Foresight Financial Group, Inc.
Annual Report 2017

Plain-text annual report

2017 Annual Report Building on the past. Investing in the future. community building through community banking the FORESIGHT BANKS Freeport, IL www.foresightfg.com Dear Stockholders, “Building on the Past, Investing in the Future” seems an apt tagline to this 2017 annual report as it leads us to reflect on the successes and challenges of the past from which we can build and focus on our investment into the future. In review of 2017 performance, we are pleased to report that your company earned a net income of $9.245 million; this is inclusive of a one-time negative tax expense adjustment of $1.206 million resultant from the signing of the Federal Tax Cuts and Job Acts Bill on December 22, 2017. During 2017, a year of modest growth, company assets increased by 2.5% or $28.45 million, total loans increased by 1.2% or $9.23 million and total deposits maintained a stable balance of $962 million. Basic earnings per common share of $2.53 was negatively impacted $0.33 per share by the aforementioned tax expense adjustment. Market performance of your company stock in the past year shows a 17.80% increase in the price/earnings ratio, an 8.91% increase in market value per share and a current stock price that surpasses book value. The company’s continued solid performance through managed interest margins, credit risk and net overhead, while fulfilling our vision and purpose as a company involved with and building the communities we serve, has been recognized by the market as an investment with strong current and future value. The content of this report focuses on past performance thus providing you, our stockholders, information necessary to evaluate the benefit of holding ownership in this company and the ability to assess your future value of maintaining that ownership. In order to instill confidence in your investment, it is incumbent that the Board and management of your company present not only past success but a forwarding looking future vision. Your company has embarked on an aggressive approach of investing in the future that began in 2017 and continues into 2018. As a result of the Federal Tax Cuts and Job Acts Bill, it is projected that the company will realize a reduced tax burden in excess of $1 million in 2018. Several opportunities were considered as to how best to employ this benefit to gain not only immediate but continued and sustained value in current and future years. Three key areas in the company’s strategic plan vision were targeted for our 2018 investment in the future. The areas of investment are technology, personnel and facility development and improvement. The following is a brief summary of our on-going investment in these areas. Technology • Anticipated capital investment of over $3.0 million in software and hardware will provide new and enhanced products and services to our customer base. Additionally, in 2017 we added State Bank of Herscher to our existing core processing software, providing opportunity for improved efficiency through utilization of a common system. A strong commitment is engrained in current and future technology decisions to assure customer data security. 2 Personnel • In 2017 the company added staff to lead the technology upgrade and conversion projects within our bank group and added a full time Corporate Director of Human Resources. We are currently seeking additional visionary leaders, relationship managers and team members to further build our strong workforce and continue the community banking mission of your company. Investment in staff, education, training and development will allow for succession planning and growth to provide shareholder return well into the future. Facility Development and Improvement • During 2017, renovation occurred at the new corporate headquarters of Foresight Financial Group in Winnebago, Illinois. Occupancy of this facility occurred in November 2017 and allowed corporate staff housed throughout various facilities to reside in one location. This facility is now a hub of activity and provides opportunity for improved synergy amongst corporate staff and bank management. In 2018, Northwest Bank of Rockford will be constructing a new full service facility along Perryville Road in Loves Park, Illinois. This stronger and more pronounced presence on the growing Northeast side of metro-Rockford will garner greater opportunity for continued sustainable growth for one of the few remaining local “community” banks in Rockford. In summary, 2017 was a year of success, learning, and growth through experience. We take pride in our 2017 financial results, but realize that improved and sustained profitability and growth requires strategic investment in the future. As stewards of your investment in Foresight, we acknowledge our significant fiduciary responsibility and will consistently strive to manage it for growth and profitability while remaining true to our mission statement of “Community Building through Community Banking”. Respectfully, Dean E. Cooke Chief Financial Officer 3 2017 Annual Report Building on the past. Investing in the future. Trends in Assets, Deposits & Loans (000’s) 1,200,000 - 1,200,000 - 900,000 - 900,000 - 800,000 - 800,000 - 700,000 - 700,000 - 600,000 - 600,000 - 500,000 - 500,000 - 0 - 0 - 1 5 5 1 , 5 6 5 7 , 0 6 , 7 1 0 , 1 5 8 4 5 , 8 1 4 6 , 9 1 6 9 8 7 4 8 , 7 5 4 3 , 1 5 , 3 1 1 , 1 9 5 6 9 , 5 1 6 6 , 9 1 6 9 3 3 9 3 , 3 3 9 6 , 1 3 , 6 1 1 , 1 3 5 9 3 , 5 2 9 2 , 9 2 2 9 0 5 2 0 , 5 3 2 1 , 9 3 1 9 1 8 4 1 , 8 6 4 6 , 7 6 6 7 0 2 9 0 , 2 7 9 7 , 7 7 7 7 1 7 2 1 , 7 8 2 0 , 7 8 0 7 2 9 7 2 , 9 3 7 8 , 8 3 8 8 8 1 7 8 , 1 6 7 3 , 7 6 3 7 7 5 0 7 , 5 9 0 2 , 7 9 2 7 7 5 0 7 , 5 2 0 7 , 8 2 7 8 6 3 3 6 , 3 5 3 6 , 7 5 6 7 , 8 3 9 8 3 6 9 9 5 6 9 5 , , 8 1 7 8 1 5 7 9 5 5 9 5 , , 5 9 7 5 9 0 7 4 6 0 4 6 , 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Loans Loans 2017 2017 Assets Assets Deposits Deposits Trends in Combined Equity Capital & ALLL* to Non Performing Assets (000’s) 6 5 5 6 , 5 8 5 0 , 1 8 0 1 3 0 0 3 , 0 9 0 9 , 9 9 , 5 9 9 5 9 7 9 1 , 1 7 1 1 , 0 4 7 0 4 3 7 2 1 3 2 1 , , 6 4 5 6 4 0 5 3 1 0 3 1 , , 8 7 7 8 7 5 7 1 5 1 , , , 5 6 2 5 6 0 2 1 0 1 2014 2014 , 6 3 9 6 3 5 9 1 5 1 , 4 4 7 4 , 5 4 1 7 , 5 1 , 8 5 9 8 5 5 9 1 5 1 , 2015 2015 Equity Capital & ALLL 2016 2016 Non Performing Assets 2017 2017 2012 2012 2013 2013 *ALLL: Allowance for loan and lease losses Equity Capital & ALLL Non Performing Assets 4 150,000 - 150,000 - 115,000 - 115,000 - 80,000 - 80,000 - 45,000 - 45,000 - 10,000 - 10,000 - 0 - 0 - 5 9 4 5 , 9 8 4 9 , 8 9 6 3 0 6 , 3 7 0 1 7 1 , 2017 Annual Report Community Building Through Community Banking Net Income (1,000,000,000’s) 11.0 - 11.0 - 10.0 - 10.0 - 9.0 - 9.0 - 8.0 - 8.0 - 7.0 - 7.0 - 6.0 - 6.0 - 5.0 - 5.0 - 4.0 - 4.0 - 3.0 - 3.0 - 2.0 - 2.0 - 1.0 - 1.0 - 0 - 0 - 4 4 5 . 0 1 4 4 5 . 0 1 3 3 9 . 9 3 3 9 . 9 5 4 2 . 9 5 4 2 . 9 0 6 2 . 8 0 6 2 . 8 8 3 8 . 6 8 3 8 . 6 6 4 4 3 . 6 4 4 3 . 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 2017 2017 Common Stock Per Share Book & Market Value - 12/31 $35.00 - $35.00 - $30.00 - $30.00 - $25.00 - $25.00 - $20.00 - $20.00 - $15.00 - $15.00 - $10.00 - $10.00 - 0 - 0 - . 7 1 2 3 $ 7 1 2 3 $ . . 0 4 2 3 $ 0 4 2 3 $ . . 5 7 9 2 $ 5 7 . 9 2 $ . 3 0 0 3 $ 3 0 0 3 $ . 9 5 . 7 2 $ 9 5 . 7 2 $ 0 6 . 4 2 $ 0 6 . 4 2 $ 7 1 . 1 2 $ 7 1 . 1 2 $ 6 9 . 4 2 $ 6 9 . 4 2 $ 0 0 . 1 2 $ 0 0 . 1 2 $ 6 8 . 2 2 $ 6 8 . 2 2 $ 5 7 . 8 1 $ 5 7 . 8 1 $ . 8 1 2 1 $ . 8 1 2 1 $ 2012 2012 2013 2013 2014 2014 2015 2015 2016 2016 Book Value 2017 2017 Market Value Book Value Market Value 5 2017 Annual Report Building on the past. Investing in the future. foresight financial group, inc. corporate headquarters 6 2017 Annual Report Community Building Through Community BankingWe are a market driven, people oriented community banking organization dedicated to enhancing shareholder value by providing our customers with diversified financial services that help them achieve economic success and financial security. We will pursue these goals while balancing shareholder and customer interests with the ongoing welfare of our employees and local communities. The member banks of our group maintain a high degree of independence and sensitivity to the concerns of the local communities and markets that we choose to serve. We will seek to expand sensibly into new markets when we believe that our business model and community banking philosophy can be successfully extended. In summary: “Community Building through Community Banking” NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Wipfli LLP 4949 Harrison Avenue Rockford, Illinois 61108 815.399.7700 Fax 815.399.7644 www.wipfli.com INDEPENDENT AUDITOR’S REPORT To the Board of Directors Foresight Financial Group, Inc. and Subsidiaries We have audited the accompanying consolidated financial statements of Foresight Financial Group, Inc. and Subsidiaries, which comprise the consolidated balance sheets as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes to the consolidated financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor’s Responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 8 2017 Annual Report Community Building Through Community Banking Opinion In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Foresight Financial Group, Inc. and Subsidiaries as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2017, in accordance with accounting principles generally accepted in the United States. Report on Supplementary Information Our audits were conducted for the purpose of forming an opinion on the consolidated financial statements as a whole. The consolidating information included in Schedules 1 and 2 is presented for purposes of additional analysis and is not a required part of the consolidated financial statements. Such information is the responsibility of management and was derived from and relates directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or to the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States. In our opinion, the information is fairly stated in all material respects in relation to the consolidated financial statements as a whole. Rockford, Illinois March 8, 2018 9 2017 Annual Report Building on the past. Investing in the future. CONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) For the years ended December 31, A S S E T S Cash and due from banks Interest-bearing deposits in banks Federal funds sold Total cash and cash equivalents Interest-bearing deposits in banks - term deposits Securities: Securities held-to-maturity (HTM) Securities available-for-sale (AFS) Non-marketable equity securities, at cost Loans held for sale Loans, net of allowance for loan losses of $13,164 and $15,496, respectively Foreclosed assets, net Premises and equipment, net Core deposit intangible Bank owned life insurance Other assets 2017 $24,334 9,427 4,634 38,395 10,672 766 273,001 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 2016 $19,974 16,120 2,767 38,861 10,607 732 256,699 2,852 2,217 766,481 1,766 13,476 1,535 21,527 18,725 Total assets $1,163,933 $1,135,478 35,143 33,598 31,070 LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Common stock ($.25 par value; authorized 10,000,000 shares; 3,979,208 and 3,949,918 shares issued, respectively) Additional paid-in capital Retained earnings Treasury stock, at cost (314,919 shares) Accumulated other comprehensive (loss) Total stockholders’ equity $137,697 823,962 961,659 8,394 32,434 28,308 10,000 5,756 1,046,551 0 995 9,410 113,811 (6,320) (514) 117,382 $143,480 818,005 961,485 1,211 25,107 23,818 10,000 5,613 1,027,234 0 988 8,955 105,518 (6,320) (897) 108,244 Total liabilities and stockholders’ equity $1,163,933 $1,135,478 Interest and dividend income: Loans, including fees Debt securities: Taxable Tax-exempt Interest-bearing deposits in banks and other Federal funds sold Total interest and dividend income Interest expense: Deposits Federal funds purchased FHLB and other borrowings Subordinated debentures Total interest expense Securities sold under agreements to repurchase Net interest and dividend income Provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Customer service fees (Loss) Gain on sales and calls of AFS securities, net Gain on sales of loans, net Loan servicing fees, net Gain on acquisition bargain purchase Other Total noninterest income Noninterest expenses: Salaries and employee benefits Occupancy expense of premises, net Outside services Data processing Foreclosed assets, net Other Total noninterest expenses Income before income taxes Income tax expense Net income Earnings per common share: Basic Diluted 2017 2016 2015 $36,241 $36,492 $31,908 3,569 3,378 474 34 43,696 6,401 29 229 426 600 7,685 36,011 868 1,127 1,658 869 0 0 3,445 7,099 15,982 2,096 1,207 946 404 7,109 27,744 14,498 5,253 $9,245 $2.53 $2.50 36,515 32,730 2,917 1,660 3,219 3,450 324 17 43,502 5,813 12 102 458 602 6,987 1,204 (167) 1,521 911 0 3,499 6,968 15,222 2,406 441 924 588 7,138 26,719 13,847 3,914 3,437 3,455 223 16 39,039 5,310 10 71 318 600 6,309 1,165 426 1,338 740 1,133 2,854 7,656 14,139 2,627 236 582 601 6,286 24,471 14,255 3,711 $9,933 $10,544 $2.73 $2.70 $2.90 $2.85 10 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 2017 Annual Report Community Building Through Community BankingCONSOLIDATED BALANCE SHEETS (000s omitted except share data) December 31, CONSOLIDATED STATEMENTS OF INCOME (000s omitted except share data) For the years ended December 31, LIABILITIES AND STOCKHOLDERS' EQUITY $1,163,933 $1,135,478 A S S E T S Cash and due from banks Interest-bearing deposits in banks Federal funds sold Total cash and cash equivalents Interest-bearing deposits in banks - term deposits Securities: Securities held-to-maturity (HTM) Securities available-for-sale (AFS) Non-marketable equity securities, at cost Loans held for sale Loans, net of allowance for loan losses of $13,164 and $15,496, respectively Foreclosed assets, net Premises and equipment, net Core deposit intangible Bank owned life insurance Other assets Total assets Liabilities: Deposits: Noninterest-bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank (FHLB) advances and other borrowings Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock (no par value; authorized 500,000 shares) Common stock ($.25 par value; authorized 10,000,000 shares; 3,979,208 and 3,949,918 shares issued, respectively) Additional paid-in capital Retained earnings Treasury stock, at cost (314,919 shares) Accumulated other comprehensive (loss) Total stockholders’ equity 2017 $24,334 9,427 4,634 38,395 10,672 766 273,001 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 $137,697 823,962 961,659 8,394 32,434 28,308 10,000 5,756 0 995 9,410 113,811 (6,320) (514) 117,382 2016 $19,974 16,120 2,767 38,861 10,607 732 256,699 2,852 2,217 766,481 1,766 13,476 1,535 21,527 18,725 $143,480 818,005 961,485 1,211 25,107 23,818 10,000 5,613 0 988 8,955 105,518 (6,320) (897) 108,244 1,046,551 1,027,234 Total liabilities and stockholders’ equity $1,163,933 $1,135,478 Interest and dividend income: Loans, including fees Debt securities: Taxable Tax-exempt Interest-bearing deposits in banks and other Federal funds sold Total interest and dividend income Interest expense: Deposits Federal funds purchased Securities sold under agreements to repurchase FHLB and other borrowings Subordinated debentures Total interest expense Net interest and dividend income Provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Customer service fees (Loss) Gain on sales and calls of AFS securities, net Gain on sales of loans, net Loan servicing fees, net Gain on acquisition bargain purchase Other Total noninterest income Noninterest expenses: Salaries and employee benefits Occupancy expense of premises, net Outside services Data processing Foreclosed assets, net Other Total noninterest expenses Income before income taxes Income tax expense Net income Earnings per common share: Basic Diluted 2017 2016 2015 $36,241 $36,492 $31,908 3,569 3,378 474 34 43,696 6,401 29 229 426 600 7,685 36,011 868 3,219 3,450 324 17 43,502 5,813 12 102 458 602 6,987 3,437 3,455 223 16 39,039 5,310 10 71 318 600 6,309 36,515 32,730 2,917 1,660 35,143 33,598 31,070 1,127 0 1,658 869 0 3,445 7,099 15,982 2,096 1,207 946 404 7,109 27,744 14,498 5,253 $9,245 $2.53 $2.50 1,204 (167) 1,521 911 0 3,499 6,968 15,222 2,406 441 924 588 7,138 26,719 13,847 3,914 1,165 426 1,338 740 1,133 2,854 7,656 14,139 2,627 236 582 601 6,286 24,471 14,255 3,711 $9,933 $10,544 $2.73 $2.70 $2.90 $2.85 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 11 2017 Annual Report Building on the past. Investing in the future. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY Net income Other comprehensive income (loss) : Unrealized holding (gains) losses on securities available for sale, net of tax of $370, $2,639 & $182, respectively Reclassification adjustments for net securities losses (gains) recognized in income, net of tax of $0, ($67) & $169, respectively Total other comprehensive income (loss) 2017 $9,245 2016 2015 $9,933 $10,544 Preferred Common Stock Stock Additional Paid-In Capital Retained Earnings Treasury Comprehensive Stock Income (Loss) Total Accumulated Other Balance, January 1, 2015 $0 $975 $8,260 $86,570 ($5,312) $3,492 $93,985 383 0 383 (3,959) (273) Other comprehensive income 100 (3,859) (257) (530) Purchase of treasury stock (20,000 shares) (475) Total comprehensive income $9,628 $6,074 $10,014 Restricted stock vested (4,075 shares) Net income Cash dividends ($.20 per share) Stock options exercised Stock-based compensation expense Net income Other comprehensive loss Cash dividends ($.22 per share) Stock options exercised Restricted stock vested (8,082 shares) Net income Other comprehensive income Cash dividends ($.26 per share) Stock options exercised Restricted stock vested (6,829 shares) 10,544 (729) 9,933 (800) 9,245 (952) 5 1 5 2 5 2 226 76 51 181 161 299 156 Balance, December 31, 2015 0 981 8,613 96,385 (5,787) 2,962 103,154 Purchase of treasury stock (21,300 shares) (533) Balance, December 31, 2016 0 988 8,955 105,518 (6,320) (897) 108,244 10,544 (530) (530) (729) (475) 231 77 51 9,933 (800) (533) 186 163 9,245 383 (952) 304 158 (3,859) (3,859) 383 Balance, December 31, 2017 $0 $995 $9,410 $113,811 ($6,320) ($514) $117,382 12 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 2017 Annual Report Community Building Through Community Banking CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (000s omitted except share data) For the years ended December 31, Preferred Common Stock Stock Additional Paid-In Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balance, January 1, 2015 $0 $975 $8,260 $86,570 ($5,312) $3,492 $93,985 Net income (3,959) (273) Other comprehensive income Cash dividends ($.20 per share) 10,544 (729) Purchase of treasury stock (20,000 shares) (475) Total comprehensive income $9,628 $6,074 $10,014 Restricted stock vested (4,075 shares) Stock options exercised Stock-based compensation expense 5 1 226 76 51 (530) 10,544 (530) (729) (475) 231 77 51 Net income Other comprehensive income (loss) : Unrealized holding (gains) losses on securities available for sale, net of tax of $370, $2,639 & $182, respectively Reclassification adjustments for net securities losses (gains) recognized in income, net of tax of $0, ($67) & $169, respectively Total other comprehensive income (loss) 2017 $9,245 2016 2015 $9,933 $10,544 383 0 383 100 (3,859) (257) (530) Balance, December 31, 2015 0 981 8,613 96,385 (5,787) 2,962 103,154 Net income Other comprehensive loss Cash dividends ($.22 per share) 9,933 (800) Purchase of treasury stock (21,300 shares) (533) Stock options exercised Restricted stock vested (8,082 shares) 5 2 181 161 9,933 (3,859) (3,859) (800) (533) 186 163 Balance, December 31, 2016 0 988 8,955 105,518 (6,320) (897) 108,244 Net income Other comprehensive income Cash dividends ($.26 per share) Stock options exercised Restricted stock vested (6,829 shares) 9,245 (952) 5 2 299 156 383 9,245 383 (952) 304 158 Balance, December 31, 2017 $0 $995 $9,410 $113,811 ($6,320) ($514) $117,382 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 13 2017 Annual Report Building on the past. Investing in the future. CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) (000s omitted except share data) For the years ended December 31, For the years ended December 31, SUPPLEMENTAL DISCLOSURES OF CASH FLOW SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: INFORMATION: Cash paid during the year for: Cash paid during the year for: Interest Interest Income taxes Income taxes 2017 2017 2016 2016 2015 2015 $7,652 $7,652 $6,919 $6,919 $6,239 $6,239 $3,011 $3,011 $1,342 $1,342 $3,901 $3,901 SUPPLEMENTAL SCHEDULE OF NONCASH SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: INVESTING ACTIVITIES: Assets acquired in exchange for deposits and liabilities assumed Assets acquired in exchange for deposits and liabilities assumed $0 $0 $0 $0 $127,975 $127,975 SUPPLEMENTAL SCHEDULE OF NONCASH SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans Foreclosed assets acquired in settlement of loans $973 $973 $1,659 $1,659 $1,878 $1,878 CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2016 2015 2017 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for foreclosed asset (gains) losses Depreciation Net amortization of securities premiums Income on bank owned life insurance Deferred income tax benefit Net loss (gain) on the sales and calls of AFS securities Net gain on the sales of foreclosed assets Stock-based compensation expense Net change in: Loans held for sale Other assets Accrued interest payable and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-bearing deposits in banks - term deposits Proceeds from sales of AFS securities Proceeds from maturities, calls, and paydowns of HTM securities Proceeds from maturities, calls, and paydowns of AFS securities Purchases of AFS securities Purchases of bank owned life insurance Redemptions of non-marketable equity securities Loan originations and principal collections, net Proceeds from sales of foreclosed assets Cash and cash equivalents from bank acquisition Purchases of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change is securities sold under agreements to repurchase Cash dividends paid Net change in federal funds purchased Stock options and restricted stock Purchase of treasury stock Proceeds from lines of credit and FHLB advances and other borrowings Payments on lines of credit and FHLB advances and other borrowings Net cash provided by financing activities $9,245 $9,933 $10,544 868 137 918 1,695 (641) 3,321 0 (134) 0 (122) (3,371) 143 12,059 (65) 0 0 38,549 (56,197) 0 1,902 (13,280) 1,644 0 (3,762) (31,209) 174 7,327 (952) 7,183 462 0 39,490 (35,000) 18,684 2,917 137 953 1,635 (447) 2,684 167 (82) 0 833 (4,336) 415 14,809 3,271 19,233 170 95,213 (99,540) (12,062) 0 (62,786) 2,944 0 (2,735) (56,292) 48,235 1,507 (800) 708 349 (533) 46,972 (44,000) 52,438 1,660 (756) 886 1,689 (235) 318 (426) (121) 51 (1,611) (3,190) (1,261) 7,548 (8,681) 20,475 565 60,813 (113,401) 0 0 (13,815) 2,930 23,756 (161) (27,519) 23,474 94 (729) (2,533) 308 (475) 41,290 (43,544) 17,885 Net increase (decrease) in cash and cash equivalents (466) 10,955 (2,086) Cash and cash equivalents at beginning of year 38,861 27,906 29,992 Cash and cash equivalents at end of year $38,395 $38,861 $27,906 14 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 2017 Annual Report Community Building Through Community BankingCONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) For the years ended December 31, CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (000s omitted except share data) For the years ended December 31, SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest Income taxes Income taxes 2017 2017 2016 2016 2015 2015 $7,652 $7,652 $6,919 $6,919 $6,239 $6,239 $3,011 $3,011 $1,342 $1,342 $3,901 $3,901 SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Assets acquired in exchange for deposits and liabilities assumed SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES: Assets acquired in exchange for deposits and liabilities assumed $0 $0 $0 $0 $127,975 $127,975 SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES: Foreclosed assets acquired in settlement of loans $973 $973 $1,659 $1,659 $1,878 $1,878 CONSOLIDATED STATEMENTS OF CASH FLOWS (000s omitted except share data) For the years ended December 31, 2017 2016 2015 $9,245 $9,933 $10,544 CASH FLOWS FROM OPERATING ACTIVITIES: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Provision for foreclosed asset (gains) losses Depreciation Net amortization of securities premiums Income on bank owned life insurance Deferred income tax benefit Net loss (gain) on the sales and calls of AFS securities Net gain on the sales of foreclosed assets Stock-based compensation expense Net change in: Loans held for sale Other assets Accrued interest payable and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES: Net change in interest-bearing deposits in banks - term deposits Proceeds from sales of AFS securities Proceeds from maturities, calls, and paydowns of HTM securities Proceeds from maturities, calls, and paydowns of AFS securities Purchases of AFS securities Purchases of bank owned life insurance Redemptions of non-marketable equity securities Loan originations and principal collections, net Proceeds from sales of foreclosed assets Cash and cash equivalents from bank acquisition Purchases of premises and equipment, net Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Net change in deposits Net change is securities sold under agreements to repurchase Cash dividends paid Net change in federal funds purchased Stock options and restricted stock Purchase of treasury stock Proceeds from lines of credit and FHLB advances and other borrowings Payments on lines of credit and FHLB advances and other borrowings Net cash provided by financing activities 868 137 918 1,695 (641) 3,321 (134) 0 0 (122) (3,371) 143 12,059 (65) 0 0 0 0 38,549 (56,197) 1,902 (13,280) 1,644 (3,762) (31,209) 174 7,327 (952) 7,183 462 0 39,490 (35,000) 18,684 2,917 137 953 1,635 (447) 2,684 167 (82) 0 833 (4,336) 415 14,809 3,271 19,233 170 95,213 (99,540) (12,062) 0 0 (62,786) 2,944 (2,735) (56,292) 48,235 1,507 (800) 708 349 (533) 46,972 (44,000) 52,438 1,660 (756) 886 1,689 (235) 318 (426) (121) 51 (1,611) (3,190) (1,261) 7,548 (8,681) 20,475 565 60,813 (113,401) 0 0 (13,815) 2,930 23,756 (161) (27,519) 23,474 94 (729) (2,533) 308 (475) 41,290 (43,544) 17,885 Net increase (decrease) in cash and cash equivalents (466) 10,955 (2,086) Cash and cash equivalents at beginning of year 38,861 27,906 29,992 Cash and cash equivalents at end of year $38,395 $38,861 $27,906 See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. See Notes to Consolidated Financial Statements. 15 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (1) Summary of Significant Accounting Policies (continued) The accounting and reporting policies of Foresight Financial Group, Inc. (Company) and its wholly-owned subsidiaries (Banks) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following is a description of the more significant accounting policies: (g) Securities (a) Nature of Operations The Company provides a variety of banking services to individuals and businesses through its facilities in the Rockford, Freeport, German Valley, Davis, Lena, Winnebago, Pecatonica, Seward, Kankakee, Loves Park, Machesney Park, and Herscher, Illinois areas. Its primary deposit products are demand deposits and certificates of deposit and its primary lending products are agriculture, agribusiness, commercial, real estate, and installment loans. (b) Basis of Consolidation The consolidated financial statements include the accounts and results of operations of the Company and its wholly-owned subsidiaries: German-American State Bank (German), State Bank of Davis (Davis), State Bank (Freeport), Northwest Bank of Rockford (Northwest), Lena State Bank (Lena), and State Bank of Herscher (Herscher) (collectively the “Banks”). All significant intercompany accounts and transactions have been eliminated in consolidation. (c) Subsequent Events The Company has evaluated subsequent events for recognition and disclosure through March 8, 2018, which is the date the financial statements were available to be issued. (d) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, deferred tax assets, fair values of securities, foreclosed assets and financial instruments are particularly susceptible to change in the near-term. (e) Cash and Cash Equivalents (j) Loans and Allowance for Loan Losses For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, interest-bearing deposits in banks, and federal funds sold, all of which generally mature within ninety days. (f) Interest-bearing Deposits in Banks Interest-bearing deposits in banks are comprised of liquid non-maturing deposits in banks but also include some balances in time deposits in banks with the maturity being the determining factor for inclusion in cash and cash equivalents with the non-maturing interest bearing deposits. Interest-bearing deposits in banks are carried at cost. 16 Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings and reported in other comprehensive income or loss. Amortization premiums and discounts are recognized in interest income using the interest method over the estimated lives or earliest call date of the securities, as applicable. Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. (h) Non-Marketable Equity Securities The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their mortgage-related assets or 4.5% of advances from the FHLB. FHLB stock is reported at cost since no ready market exists and it has no quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. . (i) Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Realized gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff; generally are reported at their outstanding unpaid principal balances adjusted for purchase premiums or discounts, charge-offs, and an allowance for loan losses. Interest on loans is accrued daily based on the unpaid principal balance. A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on a loan is generally discontinued when the loan becomes 90 days delinquent unless the credit is well-secured and in the process of collection. Credit card loans and other personal loans are typically charged off at an earlier date if collection of principal or interest is considered doubtful. Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (1) Summary of Significant Accounting Policies (continued) The accounting and reporting policies of Foresight Financial Group, Inc. (Company) and its wholly-owned subsidiaries (Banks) conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. The following is a description of the more significant accounting policies: (a) Nature of Operations estate, and installment loans. (b) Basis of Consolidation have been eliminated in consolidation. (c) Subsequent Events (d) Use of Estimates near-term. (e) Cash and Cash Equivalents mature within ninety days. (f) Interest-bearing Deposits in Banks The Company provides a variety of banking services to individuals and businesses through its facilities in the Rockford, Freeport, German Valley, Davis, Lena, Winnebago, Pecatonica, Seward, Kankakee, Loves Park, Machesney Park, and Herscher, Illinois areas. Its primary deposit products are demand deposits and certificates of deposit and its primary lending products are agriculture, agribusiness, commercial, real The consolidated financial statements include the accounts and results of operations of the Company and its wholly-owned subsidiaries: German-American State Bank (German), State Bank of Davis (Davis), State Bank (Freeport), Northwest Bank of Rockford (Northwest), Lena State Bank (Lena), and State Bank of Herscher (Herscher) (collectively the “Banks”). All significant intercompany accounts and transactions The Company has evaluated subsequent events for recognition and disclosure through March 8, 2018, which is the date the financial statements were available to be issued. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The allowance for loan losses, deferred tax assets, fair values of securities, foreclosed assets and financial instruments are particularly susceptible to change in the For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks, interest-bearing deposits in banks, and federal funds sold, all of which generally Interest-bearing deposits in banks are comprised of liquid non-maturing deposits in banks but also include some balances in time deposits in banks with the maturity being the determining factor for inclusion in cash and cash equivalents with the non-maturing interest bearing deposits. Interest-bearing deposits in banks are carried at cost. (g) Securities Debt securities that management has the positive intent and ability to hold to maturity are classified as held to maturity (HTM) and recorded at amortized cost. Securities not classified as HTM are classified as available for sale (AFS) and recorded at fair value, with unrealized gains or losses excluded from earnings and reported in other comprehensive income or loss. Amortization premiums are recognized in interest income using the interest method over the estimated lives or earliest call date of the securities, as applicable. Declines in the fair value of HTM and AFS securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific-identification method. and discounts In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. (h) Non-Marketable Equity Securities The Banks, as members of the Federal Home Loan Bank (FHLB) system, are required to maintain a minimum investment in capital stock of the FHLB in an amount equal to the greater of 0.40% of their mortgage-related assets or 4.5% of advances from the FHLB. FHLB stock is reported at cost since no ready market exists and it has no quoted market value. FHLB stock is periodically evaluated for impairment based on the ultimate recovery of par value. . (i) Loans Held for Sale Loans originated and intended for sale in the secondary market are carried at the lower of cost or market in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Mortgage loans held for sale are generally sold with mortgage servicing rights retained by the Company. The carrying value of mortgage loans sold is reduced by the cost allocated to the associated mortgage servicing rights. Realized gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold. (j) Loans and Allowance for Loan Losses Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or payoff; generally are reported at their outstanding unpaid principal balances adjusted for purchase premiums or discounts, charge-offs, and an allowance for loan losses. Interest on loans is accrued daily based on the unpaid principal balance. A loan is considered to be delinquent when payments have not been made according to contractual terms, typically evidenced by nonpayment of a monthly installment by the due date. The accrual of interest on a loan is generally discontinued when the loan becomes 90 days delinquent unless the credit is well-secured and in the process of collection. Credit card loans and other personal loans are typically charged off at an earlier date if collection of principal or interest is considered doubtful. Generally, interest accrued but not collected for loans that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. 17 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (j) Loans and Allowance for Loan Losses (continued) (j) Loans and Allowance for Loan Losses (continued) Loan-origination fees and direct origination costs are generally recognized as income or expense when received or incurred since capitalization of these fees and costs would not have a significant impact on the consolidated financial statements. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All problem loans meeting Company criteria are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected from the collateral. TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired The general component covers loans that are collectively evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not included in the impairment disclosures. The general allowance component also includes loans that are not individually identified for impairment evaluation, such as commercial loans below the individual evaluation threshold, as well as those loans that are individually evaluated but are not considered impaired. The general component is based on historical loss experience adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment or loan class and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment or loan class. These economic factors include: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and employees; national and economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Management considers the following when assessing the risk in the loan portfolio: • Residential real estate loans are affected by the local residential real estate market, the local economy, and, for variable rate mortgages, movement in indices tied to these loans. At the time of origination; the Company evaluates the borrower's repayment ability through a review of debt- to-income and credit scores. Appraisals are generally obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt at the time of origination. • Agricultural and commercial real estate loans are dependent on the industries tied to these loans. Agricultural real estate loans are primarily for land acquisition. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt; and is periodically updated during the life of the loan. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market; such as geographic location and/or property type. • Commercial and agricultural loans are primarily for working capital, physical asset expansion, asset acquisition loans and other. These loans are made based primarily on historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Financial information is obtained from the borrowers to evaluate cash flows sufficiency to service debt and is periodically updated during the life of the loan. • Consumer and other loans may take the form of installment loans, demand loans, or single payment loans and are extended to individuals for household, family, and other personal expenditures. At the time of origination; the Company evaluates the borrower's repayment ability through a review of debt-to-income and credit scores. (k) Loan Commitments The Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit issued to meet customer-financing needs. Loan commitments are recorded when they are funded. Standby or performance letters of credit are considered financial guarantees in accordance with Generally Accepted Accounting Standards and are recorded at fair value, if material. 18 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (j) Loans and Allowance for Loan Losses (continued) (j) Loans and Allowance for Loan Losses (continued) Loan-origination fees and direct origination costs are generally recognized as income or expense when received or incurred since capitalization of these fees and costs would not have a significant impact on the consolidated financial statements. The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management's judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired. A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (TDRs) and classified as impaired. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. All problem loans meeting Company criteria are individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan's existing rate or at the fair value of collateral if repayment is expected from the collateral. TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired The general component covers loans that are collectively evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not included in the impairment disclosures. The general allowance component also includes loans that are not individually identified for impairment evaluation, such as commercial loans below the individual evaluation threshold, as well as those loans that are individually evaluated but are not considered impaired. The general component is based on historical loss experience adjusted for current qualitative factors. The historical loss experience is determined by portfolio segment or loan class and is based on the actual loss history experienced by the Company. This actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment or loan class. These economic factors include: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures, and practices; experience, ability, and depth of lending management and employees; national and economic trends and conditions; industry conditions; and effects of changes in credit concentrations. Management considers the following when assessing the risk in the loan portfolio: • Residential real estate loans are affected by the local residential real estate market, the local economy, and, for variable rate mortgages, movement in indices tied to these loans. At the time of origination; the Company evaluates the borrower's repayment ability through a review of debt- to-income and credit scores. Appraisals are generally obtained to support the loan amount. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt at the time of origination. • Agricultural and commercial real estate loans are dependent on the industries tied to these loans. Agricultural real estate loans are primarily for land acquisition. Commercial real estate loans are primarily secured by office and industrial buildings, warehouses, retail shopping facilities and various special purpose properties, including hotels and restaurants. Financial information is obtained from the borrowers and/or the individual project to evaluate cash flows sufficiency to service debt; and is periodically updated during the life of the loan. Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market; such as geographic location and/or property type. • Commercial and agricultural loans are primarily for working capital, physical asset expansion, asset acquisition loans and other. These loans are made based primarily on historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors. Financial information is obtained from the borrowers to evaluate cash flows sufficiency to service debt and is periodically updated during the life of the loan. • Consumer and other loans may take the form of installment loans, demand loans, or single payment loans and are extended to individuals for household, family, and other personal expenditures. At the time of origination; the Company evaluates the borrower's repayment ability through a review of debt-to-income and credit scores. (k) Loan Commitments The Banks enter into off-balance-sheet financial instruments consisting of commitments to extend credit and letters of credit issued to meet customer-financing needs. Loan commitments are recorded when they are funded. Standby or performance letters of credit are considered financial guarantees in accordance with Generally Accepted Accounting Standards and are recorded at fair value, if material. 19 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (l) Loan Servicing (r) Income Taxes Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. The Company files consolidated Federal and State income tax returns. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Interest and penalties related to unrecognized tax benefits are classified as income taxes, if applicable. No liabilities for unrecognized tax benefits from uncertain tax positions have been recorded. Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans and are reported in other assets. When the originating mortgage loans are sold into the secondary market, the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage- servicing rights is assessed based on the fair value of those rights. The amount of impairment is the amount by which the capitalized mortgage servicing rights exceed their fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is offset against loan servicing fee income. (s) Comprehensive Income (m) Rate Lock Commitments Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and mandatory delivery forward commitments for the future delivery of these mortgage loans are to be accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage derivatives are to be estimated based on the net future cash flows related to the associated servicing of the loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect of these derivatives to be immaterial to the consolidated financial statements and, accordingly, has elected not to record fair values associated with these derivatives. (n) Foreclosed Assets Accounting principles generally require the Company to include in net income recognized revenue, expenses, gains and losses. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, net of taxes. Such items, along with net income, are components of comprehensive income. (t) Earnings Per Share Basic earnings per share (EPS) represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed assets. (u) Loss Contingencies (o) Premises and Equipment Premises and equipment are carried at cost less accumulated depreciation, based on the estimated useful lives of the assets. Depreciation is generally computed on the straight-line method over estimated useful lives ranging from 3 to 40 years. (v) Transfers of Financial Assets (p) Bank-Owned Life Insurance The Banks have purchased life insurance policies on certain key employees and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. (q) Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located in the area and communities noted above. Note 3 details the types of securities in which the Company invests. Note 4 details the types of lending in which the Company engages. The Company does not have any significant concentrations with any one industry or customer. 20 Loss contingencies, including claims and legal actions arising from time to time in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that could have a material effect on the consolidated financial statements. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. (w) Trust Assets Company. Assets of the trust departments of State Bank and State Bank of Herscher, other than trust cash on deposit at the Banks, are not included in these financial statements because they are not assets of the 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (l) Loan Servicing (r) Income Taxes Mortgage servicing rights are recognized as separate assets when rights are acquired through a sale of loans and are reported in other assets. When the originating mortgage loans are sold into the secondary market, the Company allocates the total cost of the mortgage loans between mortgage servicing rights and the loans, based on their relative fair values. The cost of originated mortgage-servicing rights is amortized in proportion to, and over the period of, estimated net servicing revenues. Impairment of mortgage- servicing rights is assessed based on the fair value of those rights. The amount of impairment is the amount by which the capitalized mortgage servicing rights exceed their fair value. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Servicing fee income is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and are recorded as income when earned. The amortization of mortgage servicing rights is offset against loan servicing fee income. (m) Rate Lock Commitments Commitments to fund mortgage loans (interest-rate locks) to be sold into the secondary market and mandatory delivery forward commitments for the future delivery of these mortgage loans are to be accounted for as derivatives not qualifying for hedge accounting. The fair values of these mortgage derivatives are to be estimated based on the net future cash flows related to the associated servicing of the loans and on changes in mortgage interest rates from the date of the commitments. Changes in fair values on these derivatives are to be included in net gains on sales of loans. The Company has deemed the effect of these derivatives to be immaterial to the consolidated financial statements and, accordingly, has elected not to record fair values associated with these derivatives. Assets acquired through or instead of loan foreclosure are initially recorded at fair value less estimated cost of disposal when acquired. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net (n) Foreclosed Assets expenses from foreclosed assets. (o) Premises and Equipment lives ranging from 3 to 40 years. (p) Bank-Owned Life Insurance The Banks have purchased life insurance policies on certain key employees and directors. Bank-owned life insurance is recorded at its cash surrender value, or the amount that can be realized. (q) Significant Group Concentrations of Credit Risk Most of the Company’s activities are with customers located in the area and communities noted above. Note 3 details the types of securities in which the Company invests. Note 4 details the types of lending in which the Company engages. The Company does not have any significant concentrations with any one industry or customer. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. The Company files consolidated Federal and State income tax returns. The Company may also recognize a liability for unrecognized tax benefits from uncertain tax positions. Unrecognized tax benefits represent the differences between a tax position taken or expected to be taken in a tax return and the benefit recognized and measured in the financial statements. Interest and penalties related to unrecognized tax benefits are classified as income taxes, if applicable. No liabilities for unrecognized tax benefits from uncertain tax positions have been recorded. (s) Comprehensive Income Accounting principles generally require the Company to include in net income recognized revenue, expenses, gains and losses. Certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the equity section of the balance sheet, net of taxes. Such items, along with net income, are components of comprehensive income. (t) Earnings Per Share Basic earnings per share (EPS) represent income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method. (u) Loss Contingencies Loss contingencies, including claims and legal actions arising from time to time in the ordinary course of business, are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that could have a material effect on the consolidated financial statements. Premises and equipment are carried at cost less accumulated depreciation, based on the estimated useful lives of the assets. Depreciation is generally computed on the straight-line method over estimated useful (v) Transfers of Financial Assets Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. (w) Trust Assets Assets of the trust departments of State Bank and State Bank of Herscher, other than trust cash on deposit at the Banks, are not included in these financial statements because they are not assets of the Company. 21 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (x) Goodwill and Intangible Assets (cc) New Accounting Standards (continued) Intangible assets attributable to the value of core deposits are stated at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets. The excess of purchase price over fair value of net assets acquired (goodwill) is not amortized. The Company evaluates whether goodwill and other intangible assets may be impaired at least annually; and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount. (y) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. (z) Stock Compensation Plans Newly Issued Not Yet Effective Accounting Standards The Company records the cost of stock-based employee compensation using the fair-value method. Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The Company has historically assumed no projected forfeitures on its stock based compensation, since forfeitures have not been significant. (aa) Advertising Advertising costs are expensed as incurred. (bb) Reclassifications Certain amounts in the 2015 and 2016 consolidated financial statements have been reclassified to conform to the 2017 presentation. (cc) New Accounting Standards In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objective of this standard is to provide a common revenue standard for all entities that enter into contracts with customers to transfer goods or services or contracts to transfer nonfinancial assets. This new accounting standard is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. The Company is evaluating what impact this new standard will have on its financial statements. 22 In October 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard simplifies various aspects of the accounting for the Company’s stock option plan. The Company adopted this new accounting standard for the year ended December 31, 2017. As a result of adopting this standard, the Company will recognize current and future excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement; has made an accounting policy election to account for forfeitures when they occur and has made an accounting policy election to apply a practical expedient when estimating the term of new stock options granted. In December 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This standard requires premiums on purchased callable debt securities to be amortized to the earliest call date. The Company adopted this new accounting standard for the year ended December 31, 2017. The adoption of this accounting standard did not have a significant effect on the Company's consolidated financial statements. In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This standard makes a number of changes to the recognition and measurement standards of financial instruments, including the following changes: 1) equity securities with a readily determinable fair value will have to be measured at fair value with changes in fair value recognized in net income; 2) entities that are public business entities will no longer be required to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; and 3) entities that are public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This new standard is effective for consolidated financial statements issued for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not believe the adoption of the standard will have a significant impact on its financial statements; except that it will no longer disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; as permitted by the standard. In April 2016, the FASB issued ASU No. 2016-02, Leases. When this standard is adopted, the primary accounting change will require lessees to recognize right of use assets and lease obligations for most operating leases; as well as finance leases. This new standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those years. The Company is evaluating what impact this new standard will have on its financial statements. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (1) Summary of Significant Accounting Policies (continued) (x) Goodwill and Intangible Assets (cc) New Accounting Standards (continued) Intangible assets attributable to the value of core deposits are stated at cost less accumulated amortization. Intangible assets are amortized on a straight-line basis over the estimated lives of the assets. The excess of purchase price over fair value of net assets acquired (goodwill) is not amortized. The Company evaluates whether goodwill and other intangible assets may be impaired at least annually; and whenever events or changes in circumstances indicate it is more likely than not the fair value of the reporting unit or asset is less than its carrying amount. (y) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase liabilities represent amounts advanced by various customers. Securities are pledged to cover these liabilities, which are not covered by federal deposit insurance. (z) Stock Compensation Plans The Company records the cost of stock-based employee compensation using the fair-value method. Compensation expense for share-based awards is recorded over the vesting period at the fair value of the award at the time of grant. The Company has historically assumed no projected forfeitures on its stock based compensation, since forfeitures have not been significant. (aa) Advertising Advertising costs are expensed as incurred. (bb) Reclassifications to the 2017 presentation. (cc) New Accounting Standards Certain amounts in the 2015 and 2016 consolidated financial statements have been reclassified to conform In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers. The objective of this standard is to provide a common revenue standard for all entities that enter into contracts with customers to transfer goods or services or contracts to transfer nonfinancial assets. This new accounting standard is effective for financial statements issued for annual reporting periods beginning after December 15, 2017. The Company is evaluating what impact this new standard will have on its financial statements. In October 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting. This standard simplifies various aspects of the accounting for the Company’s stock option plan. The Company adopted this new accounting standard for the year ended December 31, 2017. As a result of adopting this standard, the Company will recognize current and future excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement; has made an accounting policy election to account for forfeitures when they occur and has made an accounting policy election to apply a practical expedient when estimating the term of new stock options granted. In December 2017, the FASB issued ASU No. 2017-08, Premium Amortization on Purchased Callable Debt Securities. This standard requires premiums on purchased callable debt securities to be amortized to the earliest call date. The Company adopted this new accounting standard for the year ended December 31, 2017. The adoption of this accounting standard did not have a significant effect on the Company's consolidated financial statements. Newly Issued Not Yet Effective Accounting Standards In January 2016, the FASB issued ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. This standard makes a number of changes to the recognition and measurement standards of financial instruments, including the following changes: 1) equity securities with a readily determinable fair value will have to be measured at fair value with changes in fair value recognized in net income; 2) entities that are public business entities will no longer be required to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; and 3) entities that are public business entities will be required to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. This new standard is effective for consolidated financial statements issued for annual reporting periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company does not believe the adoption of the standard will have a significant impact on its financial statements; except that it will no longer disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost; as permitted by the standard. In April 2016, the FASB issued ASU No. 2016-02, Leases. When this standard is adopted, the primary accounting change will require lessees to recognize right of use assets and lease obligations for most operating leases; as well as finance leases. This new standard is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those years. The Company is evaluating what impact this new standard will have on its financial statements. 23 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (3) Securities (cc) Newly Issued Not Yet Effective Accounting Standards (continued) The following tables reflect the amortized costs and approximate fair values of securities at December 31: In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This standard will significantly change how financial assets measured at amortized cost are presented. Such assets, which include most loans and securities held to maturity, will be presented at the net amount expected to be collected over their remaining contractual lives. Estimated credit losses will be based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The standard will also change the accounting for credit losses related to securities available-for-sale and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This new accounting standard is effective for consolidated financial statements issued for annual periods beginning after December 15, 2020. The Company is evaluating what impact this new standard will have on its consolidated financial statements. Held-to-Maturity 2017 Amortized Unrealized Unrealized State and municipal $766 $50 ($0) $816 Held-to-Maturity 2016 Amortized Unrealized Unrealized State and municipal $732 $46 ($0) $778 (2) Cash Equivalents and Interest Bearing Deposits Available-for-Sale 2017 Amortized Unrealized Unrealized The Banks are required to maintain reserve balances, in cash or on deposit with the Federal Reserve Bank of Chicago, based upon a percentage of deposits. The total required reserve balances as of December 31, 2017 and 2016 was approximately $876 and $1,122, respectively. In the normal course of business, the Company maintains cash and due from bank balances in accounts with correspondent banks. Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s (FDIC) insured limit of $250. Management believes these financial institutions have strong credit ratings and that credit risk related to these deposits is not material. Interest-bearing deposits consist of certificates of deposit at other financial institutions. Certificates of deposit are in denominations of $250 or less and are fully insured by the FDIC. Certificates of deposit maturing in 2018 totaled $5,307 and are included with cash and cash equivalents. Maturities of certificates of deposits at other financial institutions as of December 31, 2017 are as follows: U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential 2019 2020 2021 2022 and thereafter $5,432 996 1,486 2,758 $10,672 Available-for-Sale 2016 Amortized Unrealized Unrealized Gross Losses Fair Value Gross Gains Gross Gains Gross Gains Gross Losses Gross Losses Gross Losses Fair Value Fair Value Fair Value Cost Cost Cost $43,288 117,481 112,953 $58 2,068 304 ($1,066) (459) (1,626) $42,280 119,090 111,630 $273,722 $2,431 ($3,152) $273,001 Gross Gains $119 2,192 415 Cost $36,148 116,283 105,741 ($1,051) (1,358) (1,790) $35,216 117,117 104,366 $258,172 $2,726 ($4,199) $256,699 For the years ended December 31, 2017, 2016 and 2015, proceeds from sales of available-for-sale securities amounted to $0, $19,233 and $20,475, respectively. Gross realized gains and losses from the sales and calls of available-for-sale securities for the years ended December 31 are as follows: Realized gains Realized losses 2017 2016 2015 $0 ($0) $332 ($499) $589 ($163) Securities with carrying amounts of approximately $153,862 and $145,171 at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 24 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (1) Summary of Significant Accounting Policies (continued) (3) Securities (cc) Newly Issued Not Yet Effective Accounting Standards (continued) The following tables reflect the amortized costs and approximate fair values of securities at December 31: In June 2016, the FASB issued ASU No. 2016-13, Measurement of Credit Losses on Financial Instruments. This standard will significantly change how financial assets measured at amortized cost are presented. Such assets, which include most loans and securities held to maturity, will be presented at the net amount expected to be collected over their remaining contractual lives. Estimated credit losses will be based on relevant information about historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amounts. The standard will also change the accounting for credit losses related to securities available-for-sale and purchased financial assets with a more-than-insignificant amount of credit deterioration since origination. This new accounting standard is effective for consolidated financial statements issued for annual periods beginning after December 15, 2020. The Company is evaluating what impact this new standard will have on its consolidated financial statements. (2) Cash Equivalents and Interest Bearing Deposits The Banks are required to maintain reserve balances, in cash or on deposit with the Federal Reserve Bank of Chicago, based upon a percentage of deposits. The total required reserve balances as of December 31, 2017 and 2016 was approximately $876 and $1,122, respectively. In the normal course of business, the Company maintains cash and due from bank balances in accounts with correspondent banks. Balances in these accounts may exceed the Federal Deposit Insurance Corporation’s (FDIC) insured limit of $250. Management believes these financial institutions have strong credit ratings and that credit risk related to these deposits is not material. Interest-bearing deposits consist of certificates of deposit at other financial institutions. Certificates of deposit are in denominations of $250 or less and are fully insured by the FDIC. Certificates of deposit maturing in 2018 totaled $5,307 and are included with cash and cash equivalents. Maturities of certificates of deposits at other financial institutions as of December 31, 2017 are as follows: 2019 2020 2021 2022 and thereafter $5,432 996 1,486 2,758 $10,672 Held-to-Maturity 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $766 $50 ($0) $816 Held-to-Maturity 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value State and municipal $732 $46 ($0) $778 Available-for-Sale 2017 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $43,288 117,481 112,953 $58 2,068 304 ($1,066) (459) (1,626) $42,280 119,090 111,630 $273,722 $2,431 ($3,152) $273,001 Available-for-Sale 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $36,148 116,283 105,741 $119 2,192 415 ($1,051) (1,358) (1,790) $35,216 117,117 104,366 $258,172 $2,726 ($4,199) $256,699 For the years ended December 31, 2017, 2016 and 2015, proceeds from sales of available-for-sale securities amounted to $0, $19,233 and $20,475, respectively. Gross realized gains and losses from the sales and calls of available-for-sale securities for the years ended December 31 are as follows: Realized gains Realized losses 2017 2016 2015 $0 ($0) $332 ($499) $589 ($163) Securities with carrying amounts of approximately $153,862 and $145,171 at December 31, 2017 and 2016, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. 25 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) (3) Securities (continued) The amortized costs and fair values of securities at December 31, 2017 are shown below by contractual maturities, except for U.S. agencies which are shown by contractual maturities or their expected call dates if the call dates are considered likely to occur based on present market conditions. Expected maturities may differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Available-for-Sale Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Agency mortgage-backed – residential Amortized Cost Fair Value $269 0 497 0 $766 $275 0 541 0 $816 Amortized Cost Fair Value $11,695 37,060 68,666 43,347 160,769 112,953 $11,831 37,371 68,294 43,875 161,371 111,630 $273,722 $273,001 The following tables show the fair values and unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2017 and 2016: 2017 Available-for-Sale Less than 12 Months 12 Months or More Gross Unrealized No. of Gross Unrealized No. of Fair Value Loss Securities Fair Value Loss Securities U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $18,846 26,609 39,220 $274 257 414 40 89 77 $19,794 7,232 $792 202 54,121 1,212 Total temporarily impaired $84,675 $945 206 $81,147 $2,206 2016 Available-for-Sale Less than 12 Months 12 Months or More Gross Unrealized No. of Gross Unrealized No. of Fair Value Loss Securities Fair Value Loss Securities U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $25,476 48,030 $1,051 1,290 77,787 1,731 $0 999 2,851 $0 68 59 52 167 138 357 Total temporarily impaired $151,293 $4,072 $3,850 $127 There were no held-to-maturity securities in an unrealized loss position as of December 31, 2017 and 2016. Unrealized losses on securities have not been recognized into income because the bonds are of high credit quality, management has the intent and ability to hold for the foreseeable future and the decline in fair value is largely due to market interest rate fluctuations and current bond markets. The fair value is expected to recover as the bonds approach their maturity dates and/or market rates. 39 28 101 168 0 4 6 10 26 2017 Annual Report Community Building Through Community Banking The amortized costs and fair values of securities at December 31, 2017 are shown below by contractual maturities, except for U.S. agencies which are shown by contractual maturities or their expected call dates if the call dates are considered likely to occur based on present market conditions. Expected maturities may differ from contractual maturities on mortgage-backed securities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Held-to-Maturity Amortized Cost Fair Value Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Agency mortgage-backed – residential Available-for-Sale Amortized Cost Fair Value $269 497 0 0 $766 $11,695 37,060 68,666 43,347 160,769 112,953 $275 541 0 0 $816 $11,831 37,371 68,294 43,875 161,371 111,630 $273,722 $273,001 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (3) Securities (continued) (3) Securities (continued) The following tables show the fair values and unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2017 and 2016: 2017 Available-for-Sale Less than 12 Months Gross Unrealized Loss No. of Securities Fair Value 12 Months or More Gross Unrealized Loss No. of Securities Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $18,846 26,609 39,220 $274 257 414 40 89 77 $19,794 7,232 $792 202 54,121 1,212 Total temporarily impaired $84,675 $945 206 $81,147 $2,206 39 28 101 168 2016 Available-for-Sale Less than 12 Months Gross Unrealized Loss No. of Securities Fair Value 12 Months or More Gross Unrealized Loss No. of Securities Fair Value U.S. Government sponsored entities and U.S. agencies State and municipal Agency mortgage-backed – residential $25,476 48,030 $1,051 1,290 77,787 1,731 Total temporarily impaired $151,293 $4,072 52 167 138 357 $0 999 2,851 $0 68 59 $3,850 $127 0 4 6 10 There were no held-to-maturity securities in an unrealized loss position as of December 31, 2017 and 2016. Unrealized losses on securities have not been recognized into income because the bonds are of high credit quality, management has the intent and ability to hold for the foreseeable future and the decline in fair value is largely due to market interest rate fluctuations and current bond markets. The fair value is expected to recover as the bonds approach their maturity dates and/or market rates. 27 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (4) Loans (continued) The following table presents total loans at December 31 by portfolio segment and class of loan: Real Estate Commercial Consumer Total 2016 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial and industrial Agricultural production Consumer and other Allowance for loan losses Totals 2017 2016 $277,448 116,632 101,027 208,868 64,255 22,854 791,084 (13,164) $273,920 117,173 99,967 206,609 65,628 18,680 781,977 (15,496) $777,920 $766,481 Detailed analysis of the allowance for loan losses by portfolio segments at December 31 are as follows: Totals $10,063 $5,266 $167 $15,496 Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Real Estate Commercial Consumer Total 2017 $10,063 734 136 10,933 (3,261) $5,266 148 351 5,765 (423) $167 (14) 16 169 (19) $15,496 868 503 16,867 (3,703) $7,672 $5,342 $150 $13,164 Balance at end of year $10,851 $3,897 $93 $14,841 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit Totals $413 7,259 0 0 $7,672 $1,763 3,579 0 0 $5,342 $20 130 0 0 $2,196 10,968 0 0 Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit $150 $13,164 Totals $10,851 $3,897 $93 $14,841 Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off $10,063 $5,266 $167 $15,496 $10,851 1,004 109 11,964 (1,901) $2,822 7,241 0 0 $10,231 1,720 73 12,024 (1,173) $3,899 6,952 0 0 $3,897 1,818 46 5,761 (495) $1,786 3,480 0 0 $4,237 (62) 27 4,202 (305) $460 3,437 0 0 $93 95 13 201 (34) $21 146 0 0 $14,841 2,917 168 17,926 (2,430) $4,629 10,867 0 0 $103 2 22 127 (34) $14,571 1,660 122 16,353 (1,512) $6 87 0 0 $4,365 10,476 0 0 Real Estate Commercial Consumer Total 2015 28 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (4) Loans (continued) The following table presents total loans at December 31 by portfolio segment and class of loan: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial and industrial Agricultural production Consumer and other Allowance for loan losses Totals 2017 2016 $277,448 116,632 101,027 208,868 64,255 22,854 791,084 (13,164) $273,920 117,173 99,967 206,609 65,628 18,680 781,977 (15,496) $777,920 $766,481 Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit Detailed analysis of the allowance for loan losses by portfolio segments at December 31 are as follows: Totals Real Estate Commercial Consumer Total 2016 $10,851 1,004 109 11,964 (1,901) $3,897 1,818 46 5,761 (495) $93 95 13 201 (34) $14,841 2,917 168 17,926 (2,430) $10,063 $5,266 $167 $15,496 $2,822 7,241 0 0 $10,063 $1,786 3,480 0 0 $5,266 $21 146 0 0 $4,629 10,867 0 0 $167 $15,496 Real Estate Commercial Consumer Total 2015 $7,672 $5,342 $150 $13,164 Balance at end of year $10,851 $3,897 $93 $14,841 Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off $10,231 1,720 73 12,024 (1,173) $4,237 (62) 27 4,202 (305) $103 2 22 127 (34) $14,571 1,660 122 16,353 (1,512) Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit $3,899 6,952 0 0 $460 3,437 0 0 $6 87 0 0 $4,365 10,476 0 0 Totals $7,672 $5,342 $150 $13,164 Totals $10,851 $3,897 $93 $14,841 Real Estate Commercial Consumer Total 2017 Balance at beginning of year Provision charged to operations, net Recoveries on loans previously charged-off Less loans charged-off Balance at end of year Allowance for loan losses: Individually evaluated for impairment Collectively evaluated for impairment Loans acquired with deteriorated credit Loans acquired without deteriorated credit $10,063 734 136 10,933 (3,261) $413 7,259 0 0 $5,266 148 351 5,765 (423) $1,763 3,579 0 0 $167 (14) 16 169 (19) $20 130 0 0 $15,496 868 503 16,867 (3,703) $2,196 10,968 0 0 29 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 follows: Detailed information regarding impaired loans by class of loan as of December 31 follows: Real Estate Commercial Consumer Total 2017 Loans: Individually evaluated for impairment Collectively evaluated for impairment $21,649 473,459 $14,427 258,695 $28 22,826 $36,104 754,980 Totals $495,108 $273,122 $22,854 $791,084 Real Estate Commercial Consumer Total 2016 Loans: Individually evaluated for impairment Collectively evaluated for impairment $24,518 466,542 $9,460 262,777 $63 18,617 $34,041 747,936 Totals $491,060 $272,237 $18,680 $781,977 Totals $28,664 $34,053 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals Recorded Investment Principal Balance Related Allowance Average Investment Interest Recognized 2017 $7,576 5,519 3,707 6,185 5,669 8 $9,918 7,132 4,243 7,063 5,688 9 3,825 872 151 2,573 0 19 3,916 936 234 2,613 0 19 7,440 7,718 N/A N/A N/A N/A N/A N/A 295 95 24 1,763 0 19 2,196 $8,046 6,131 3,804 6,523 5,110 15 $29,629 4,209 1,182 427 2,653 0 21 8,492 $282 148 150 146 237 0 $963 112 17 0 67 0 1 197 $36,104 $41,771 $2,196 $38,121 $1,160 30 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) Detailed analysis of loans evaluated for impairment by portfolio segment for the year ended December 31 Detailed information regarding impaired loans by class of loan as of December 31 follows: Recorded Investment Principal Balance Related Allowance Average Investment Interest Recognized 2017 follows: Loans: Totals Loans: Totals Real Estate Commercial Consumer Total Individually evaluated for impairment Collectively evaluated for impairment $21,649 473,459 $14,427 258,695 $28 22,826 $36,104 754,980 2017 2016 $495,108 $273,122 $22,854 $791,084 Real Estate Commercial Consumer Total $491,060 $272,237 $18,680 $781,977 Individually evaluated for impairment Collectively evaluated for impairment $24,518 466,542 $9,460 262,777 $63 18,617 $34,041 747,936 Totals $28,664 $34,053 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other $7,576 5,519 3,707 6,185 5,669 8 $9,918 7,132 4,243 7,063 5,688 9 N/A N/A N/A N/A N/A N/A 295 95 24 1,763 0 19 2,196 $8,046 6,131 3,804 6,523 5,110 15 $29,629 4,209 1,182 427 2,653 0 21 8,492 $282 148 150 146 237 0 $963 112 17 0 67 0 1 197 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals 3,825 872 151 2,573 0 19 3,916 936 234 2,613 0 19 7,440 7,718 $36,104 $41,771 $2,196 $38,121 $1,160 31 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) Recorded Investment Principal Balance 2016 Related Allowance Average Investment Interest Recognized Recorded Investment Principal Balance Allowance Investment Recognized Average Interest 2015 Related Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other $3,399 8,235 3,764 6,704 133 42 $4,823 10,762 4,182 7,212 367 54 Totals 22,277 27,400 N/A N/A N/A N/A N/A N/A 2,671 151 0 1,786 0 21 4,629 $3,846 8,928 4,055 6,345 165 70 23,409 8,908 365 0 1,786 0 22 11,081 $177 263 121 315 16 3 895 914 19 0 51 0 2 986 8,780 340 0 2,623 0 21 8,864 382 0 2,656 0 21 11,764 11,923 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals 32 $34,041 $39,323 $4,629 $34,490 $1,881 $33,211 $44,004 $4,365 $43,766 $1,450 Total 18,918 29,222 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Total Grand Total $4,608 7,162 1,428 5,628 0 92 9,743 3,847 0 653 34 16 $5,334 10,575 1,833 11,132 245 103 9,988 4,078 0 667 34 15 N/A N/A N/A N/A N/A N/A 2,748 1,151 455 0 5 6 $5,323 9,287 1,840 12,316 259 120 29,145 9,929 3,948 0 691 37 16 14,293 14,782 4,365 14,621 $251 226 65 306 17 6 871 480 68 0 31 0 0 579 The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loan losses. The Company generally monitors credit quality indicators for all loans using the following internally prepared ratings: 'Pass' ratings are assigned to loans with adequate collateral and debt service ability; such that collectability of the contractual loan payments is highly probable. 'Special Mention' ratings are assigned to loans where management has some concern that the collateral or debt service ability may not be adequate, though the collectability of the contractual loan payments is still probable. 'Substandard' ratings are assigned to loans that do not have adequate collateral and/or debt service ability; such that collectability of the contractual loan payments is no longer probable. 'Doubtful' ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and collectability of the contractual loan payments is unlikely. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) Recorded Investment Principal Balance Allowance Investment Recognized Average Interest 2016 Related Recorded Investment Principal Balance 2015 Related Allowance Average Investment Interest Recognized Totals 22,277 27,400 Total 18,918 29,222 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other $4,608 7,162 1,428 5,628 0 92 $5,334 10,575 1,833 11,132 245 103 Loans with no related allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Totals Grand Totals $3,399 8,235 3,764 6,704 133 42 8,780 340 0 2,623 0 21 $4,823 10,762 4,182 7,212 367 54 8,864 382 0 2,656 0 21 N/A N/A N/A N/A N/A N/A 2,671 151 0 1,786 0 21 4,629 $3,846 8,928 4,055 6,345 165 70 23,409 8,908 365 0 1,786 0 22 11,081 $177 263 121 315 16 3 895 914 19 0 51 0 2 986 11,764 11,923 $34,041 $39,323 $4,629 $34,490 $1,881 Loans with an allowance for loan losses: Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Total Grand Total 9,743 3,847 0 653 34 16 9,988 4,078 0 667 34 15 N/A N/A N/A N/A N/A N/A 2,748 1,151 0 455 5 6 $5,323 9,287 1,840 12,316 259 120 29,145 9,929 3,948 0 691 37 16 $251 226 65 306 17 6 871 480 68 0 31 0 0 579 14,293 14,782 4,365 14,621 $33,211 $44,004 $4,365 $43,766 $1,450 The Company regularly evaluates various attributes of loans to determine the appropriateness of the allowance for loan losses. The Company generally monitors credit quality indicators for all loans using the following internally prepared ratings: 'Pass' ratings are assigned to loans with adequate collateral and debt service ability; such that collectability of the contractual loan payments is highly probable. 'Special Mention' ratings are assigned to loans where management has some concern that the collateral or debt service ability may not be adequate, though the collectability of the contractual loan payments is still probable. 'Substandard' ratings are assigned to loans that do not have adequate collateral and/or debt service ability; such that collectability of the contractual loan payments is no longer probable. 'Doubtful' ratings are assigned to loans that do not have adequate collateral and/or debt service ability, and collectability of the contractual loan payments is unlikely. 33 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) Information regarding the credit quality indicators most closely monitored by class of loan at December 31 follows: Total Past Due Total Current Total Loans 90+ Days Due and Total Non-accrual Accruing Interest Loans Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other Pass Special Mention Substandard Doubtful Totals 2017 $249,950 110,068 85,038 181,958 50,626 22,807 $16,620 1,892 12,264 18,880 7,958 20 $10,878 4,672 3,726 7,967 5,669 27 $0 0 0 64 0 0 $277,448 116,632 101,027 208,868 64,255 22,854 Total $700,447 $57,634 $32,939 $64 $791,084 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other Pass Special Mention Substandard Doubtful Totals 2016 $258,187 108,820 85,584 196,404 57,266 18,590 $5,110 883 10,349 1,330 8,229 27 $10,609 7,418 3,764 8,807 133 63 $14 52 0 68 0 0 $273,920 117,173 99,967 206,609 65,628 18,680 Total $725,121 $25,928 $30,794 $134 $781,977 Loan aging information by class of loan at December 31 follows: As of December 31, 2017 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans Past Due 30-89 Days Loans Past Due 90+ Days Total Past Due $1,118 1,319 49 371 0 65 $275 1,804 1,480 312 70 3 $1,393 3,123 1,529 683 70 68 Total $2,922 $3,944 $6,866 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) As of December 31, 2017 Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $1,393 3,123 1,529 683 70 68 $276,055 113,509 99,498 208,185 64,185 22,786 $277,448 116,632 101,027 208,868 64,255 22,854 Total $6,866 $784,219 $791,084 $46 $14,820 Loans Past Due Loans Past Due 30-89 Days 90+ Days Total Past Due As of December 31, 2016 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other $8,082 1,848 0 280 150 49 Total $10,409 $8,309 $18,718 As of December 31, 2016 Total Past Due Total Current Total Loans 90+ Days Due and Total Non-accrual Accruing Interest Loans Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $8,314 4,484 1,528 4,091 239 62 $266,173 112,689 98,439 201,951 65,389 18,618 $273,920 117,173 99,967 206,609 65,628 18,680 $46 $232 2,636 1,528 3,811 89 13 $399 $5,147 3,037 2,444 4,165 24 3 $8,314 4,484 1,528 4,091 239 62 $1,090 4,949 2,938 4,467 108 27 Total $18,718 $763,259 $781,977 $399 $13,579 When, for economic or legal reasons related to the borrower's financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, interest only payments for a period of time, and/or extending amortization terms. All troubled debt restructurings are classified as impaired loans. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Information regarding the credit quality indicators most closely monitored by class of loan at December 31 As of December 31, 2017 (4) Loans (continued) (4) Loans (continued) follows: Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Pass Substandard Doubtful Totals Special Mention Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $249,950 110,068 85,038 181,958 50,626 22,807 $16,620 1,892 12,264 18,880 7,958 20 2017 $10,878 4,672 3,726 7,967 5,669 27 2016 $10,609 7,418 3,764 8,807 133 63 $0 0 0 64 0 0 $14 52 0 68 0 0 $277,448 116,632 101,027 208,868 64,255 22,854 $273,920 117,173 99,967 206,609 65,628 18,680 Total $700,447 $57,634 $32,939 $64 $791,084 Pass Substandard Doubtful Totals Special Mention Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $258,187 108,820 85,584 196,404 57,266 18,590 $5,110 883 10,349 1,330 8,229 27 Total $725,121 $25,928 $30,794 $134 $781,977 Loan aging information by class of loan at December 31 follows: As of December 31, 2017 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans Past Due Loans Past Due 30-89 Days 90+ Days Total Past Due $1,118 1,319 49 371 0 65 $275 1,804 1,480 312 70 3 $1,393 3,123 1,529 683 70 68 Total $2,922 $3,944 $6,866 Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $1,393 3,123 1,529 683 70 68 $276,055 113,509 99,498 208,185 64,185 22,786 $277,448 116,632 101,027 208,868 64,255 22,854 $46 $5,147 3,037 2,444 4,165 24 3 Total $6,866 $784,219 $791,084 $46 $14,820 As of December 31, 2016 Real estate: Commercial real estate Residential real estate Agricultural real estate Commercial Commercial & industrial Agricultural production Consumer and other Loans Past Due 30-89 Days Loans Past Due 90+ Days Total Past Due $8,082 1,848 0 280 150 49 $232 2,636 1,528 3,811 89 13 $8,314 4,484 1,528 4,091 239 62 Total $10,409 $8,309 $18,718 As of December 31, 2016 Total Past Due Total Current Total Loans 90+ Days Due and Accruing Interest Total Non-accrual Loans Real Estate: Commercial real estate Residential real estate Agricultural real estate Commercial: Commercial & industrial Agricultural production Consumer and other $8,314 4,484 1,528 4,091 239 62 $266,173 112,689 98,439 201,951 65,389 18,618 $273,920 117,173 99,967 206,609 65,628 18,680 $399 $1,090 4,949 2,938 4,467 108 27 Total $18,718 $763,259 $781,977 $399 $13,579 When, for economic or legal reasons related to the borrower's financial difficulties, the Company grants a concession to the borrower that the Company would not otherwise consider the modified loan is classified as a troubled debt restructuring. Loan modifications may consist of forgiveness of interest and/or principal, a reduction of the interest rate, interest only payments for a period of time, and/or extending amortization terms. All troubled debt restructurings are classified as impaired loans. 35 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) The following table presents information regarding modifications of loans that are classified as troubled debt restructurings by class of loan that occurred during the years ended December 31: The Company has acquired purchased credit impaired (PCl) loans, which are loans that, at acquisition, evidenced deterioration of credit quality since origination, and the Company determined it was probable, at the acquisition date, all contractually required payments would not be collected. These loans are included in the 2017 carrying amount of loans in the Company's Balance Sheet. The outstanding balance and carrying amount of PCI loans for the year ended December 31 follows: Real Estate: Commercial real estate Residential real estate Commercial: Commercial & industrial Total Real Estate: Residential real estate Commercial: Commercial & industrial Total Number of Loans Pre-Modification Investment Post-Modification Investment 1 1 3 5 $6,939 $90 $464 $7,493 2016 $4,800 $90 $154 $5,044 Number of Loans Pre-Modification Investment Post-Modification Investment 1 4 5 $1,140 $1,068 $2,208 $800 $2,779 $3,579 There were no troubled debt restructurings that defaulted during the year, within 12 months of their modification as of December 31, 2017. As for December 31, 2016, the following table summarizes troubled debt restructurings that defaulted during the year, within 12 months of their modification: Commercial: Commercial & industrial Total 2016 Number of Loans Recorded Investment 1 1 $176 $176 Outstanding balance: Commercial Residential Real Estate Total outstanding balance follows: Beginning balance Accretion Ending Balance and 2016. 2017 $2,870 221 $3,091 2017 $0 (0) $0 2016 $3,283 278 $3,561 2016 $276 (276) $0 The carrying value of the PCI loans was $1,717 and $1,956 at December 31, 2017 and 2016, respectively. No increases to the allowance for loan losses were done for PCI loans during 2017 and 2016. No allowances for loan losses were reversed during 2017 and 2016. A summary of the change in the accretable yield related to PCI loans during the year ended December 31 Some PCI loans are not accruing interest income because the Company cannot reasonable estimate the cash flows expected to be collected. The carrying amount of nonaccruing PCI loans was $891 and $0 at December 31, 2017 and 2016, respectively. The carrying amount of nonaccruing PCI loans acquired was $0 during 2017 36 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (4) Loans (continued) (4) Loans (continued) The Company has acquired purchased credit impaired (PCl) loans, which are loans that, at acquisition, evidenced deterioration of credit quality since origination, and the Company determined it was probable, at the acquisition date, all contractually required payments would not be collected. These loans are included in the carrying amount of loans in the Company's Balance Sheet. The outstanding balance and carrying amount of PCI loans for the year ended December 31 follows: Outstanding balance: Commercial Residential Real Estate Total outstanding balance 2017 $2,870 221 $3,091 2016 $3,283 278 $3,561 The carrying value of the PCI loans was $1,717 and $1,956 at December 31, 2017 and 2016, respectively. No increases to the allowance for loan losses were done for PCI loans during 2017 and 2016. No allowances for loan losses were reversed during 2017 and 2016. A summary of the change in the accretable yield related to PCI loans during the year ended December 31 follows: There were no troubled debt restructurings that defaulted during the year, within 12 months of their modification as of December 31, 2017. As for December 31, 2016, the following table summarizes troubled debt restructurings that defaulted during the year, within 12 months of their modification: Beginning balance Accretion Ending Balance 2017 $0 (0) $0 2016 $276 (276) $0 Some PCI loans are not accruing interest income because the Company cannot reasonable estimate the cash flows expected to be collected. The carrying amount of nonaccruing PCI loans was $891 and $0 at December 31, 2017 and 2016, respectively. The carrying amount of nonaccruing PCI loans acquired was $0 during 2017 and 2016. The following table presents information regarding modifications of loans that are classified as troubled debt restructurings by class of loan that occurred during the years ended December 31: Number of Pre-Modification Post-Modification Loans Investment Investment Real Estate: Commercial real estate Residential real estate Commercial: Commercial & industrial Total Real Estate: Residential real estate Commercial: Commercial & industrial Total Commercial: Commercial & industrial Total 2017 2016 $6,939 $90 $464 $7,493 $1,140 $1,068 $2,208 1 1 3 5 1 4 5 $4,800 $90 $154 $5,044 $800 $2,779 $3,579 Number of Pre-Modification Post-Modification Loans Investment Investment 2016 Number of Loans Recorded Investment 1 1 $176 $176 37 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (5) Loan Servicing (8) Premises and Equipment Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans serviced for others as of December 31, 2017 and 2016, were approximately $342,567 and $347,152, respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $3,645 and $3,498 at December 31, 2017 and 2016, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: Balance at beginning of year Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year 2017 $1,328 445 (483) $1,290 2016 $1,324 545 (541) $1,328 2015 $1,451 457 (584) $1,324 No impairment of mortgage servicing rights existed and no valuation allowance was recognized for 2017, 2016 and 2015. (6) Mortgage Banking Loan Commitments The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified times in the future, with the intention that these loans will be subsequently sold to third-party investors. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. It is the Company’s practice to enter into mandatory delivery forward commitments for the future delivery of residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- party investor even if the underlying loan never funds. As of December 31, 2017 and 2016, the Company had approximately $296 and $2,269 in interest rate lock commitments outstanding. As of December 31, 2017 and 2016, the Company had approximately $591 and $4,537 in mandatory delivery forward commitments outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The approximate fair values associated with these derivatives were considered to be immaterial as of December 31, 2017 and 2016. (7) Foreclosed Assets Foreclosed assets net of valuation allowance consist of the following at December 31: Residential real estate Commercial real estate Non-farm non-residential properties Construction, land development and other land Balance at end of year 2017 2016 $273 327 215 277 $1,155 49 246 316 $1,092 $1,766 Residential real estate loans that are in process of foreclosure totaled $719 at December 31, 2017 and $1,521 at December 31, 2016. 38 The components of premises and equipment at December 31 are as follows: Land Buildings and leasehold improvements Furniture, fixtures, and equipment Less accumulated depreciation Depreciation expense for the years ended December 31, 2017, 2016 and 2015 amounted to $918, $953 and The core deposit premium intangible asset had a gross carrying amount of $1,952 and accumulated amortization of $729 and $417 at December 31, 2017 and 2016, respectively. The following table shows the estimated future amortization of the core deposit premium intangible asset for the next five years. The projections of amortization expense are based on existing asset balances as of $886, respectively. (9) Intangible Assets December 31, 2017. 2018 2019 2020 2021 (10) Other Assets The components of other assets at December 31 are as follows: Accrued interest receivable Mortgage servicing rights, net of accumulated amortization Net deferred tax assets Other 2017 2016 $3,539 17,700 11,991 33,230 16,910 $2,882 15,362 11,510 29,754 16,278 $16,320 $13,476 $315 315 315 278 2017 2016 $5,881 1,290 3,632 8,284 $5,719 1,328 6,949 4,729 $19,087 $18,725 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (5) Loan Servicing (8) Premises and Equipment The components of premises and equipment at December 31 are as follows: Land Buildings and leasehold improvements Furniture, fixtures, and equipment Less accumulated depreciation 2017 2016 $3,539 17,700 11,991 33,230 16,910 $2,882 15,362 11,510 29,754 16,278 $16,320 $13,476 Depreciation expense for the years ended December 31, 2017, 2016 and 2015 amounted to $918, $953 and $886, respectively. No impairment of mortgage servicing rights existed and no valuation allowance was recognized for 2017, 2016 and 2015. (9) Intangible Assets The core deposit premium intangible asset had a gross carrying amount of $1,952 and accumulated amortization of $729 and $417 at December 31, 2017 and 2016, respectively. The following table shows the estimated future amortization of the core deposit premium intangible asset for the next five years. The projections of amortization expense are based on existing asset balances as of December 31, 2017. 2018 2019 2020 2021 (10) Other Assets The components of other assets at December 31 are as follows: Accrued interest receivable Mortgage servicing rights, net of accumulated amortization Net deferred tax assets Other $315 315 315 278 2017 2016 $5,881 1,290 3,632 8,284 $5,719 1,328 6,949 4,729 $19,087 $18,725 39 Loans serviced for others are not included in the accompanying consolidated balance sheets. Mortgage loans serviced for others as of December 31, 2017 and 2016, were approximately $342,567 and $347,152, respectively. Custodial escrow balances maintained in conjunction with serviced loans were approximately $3,645 and $3,498 at December 31, 2017 and 2016, respectively. The following summarizes the activity pertaining to mortgage servicing rights for the years ended December 31: Balance at beginning of year Mortgage servicing rights capitalized Mortgage servicing rights amortized Balance at end of year 2017 $1,328 445 (483) $1,290 2016 $1,324 545 (541) $1,328 2015 $1,451 457 (584) $1,324 (6) Mortgage Banking Loan Commitments The Company enters into commitments to fund residential mortgage loans (interest rate locks) at specified times in the future, with the intention that these loans will be subsequently sold to third-party investors. A mortgage loan commitment binds the Company to lend funds to a potential borrower at a specified interest rate and within a specified period of time, generally up to 60 days after inception of the rate lock. It is the Company’s practice to enter into mandatory delivery forward commitments for the future delivery of residential mortgage loans to third-party investors when an interest rate lock commitment is granted. These mandatory delivery forward commitments bind the Company to deliver a residential mortgage loan to a third- party investor even if the underlying loan never funds. As of December 31, 2017 and 2016, the Company had approximately $296 and $2,269 in interest rate lock commitments outstanding. As of December 31, 2017 and 2016, the Company had approximately $591 and $4,537 in mandatory delivery forward commitments outstanding. These outstanding mortgage loan commitments are considered to be derivatives. The approximate fair values associated with these derivatives were considered to be immaterial as of December 31, 2017 and 2016. (7) Foreclosed Assets Foreclosed assets net of valuation allowance consist of the following at December 31: Residential real estate Commercial real estate Non-farm non-residential properties Construction, land development and other land Balance at end of year December 31, 2016. Residential real estate loans that are in process of foreclosure totaled $719 at December 31, 2017 and $1,521 at 2017 2016 $273 327 215 277 $1,155 49 246 316 $1,092 $1,766 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (11) Time Deposits (12) Employee and Director Benefit Plans (continued) The aggregate amount of time deposits with a minimum denomination of $250 was approximately $54,644 and $56,863 at December 31, 2017 and 2016, respectively. Time deposits are included in the interest-bearing deposits for financial statement presentation. as follows: A summary of the weighted average asset allocations of plan assets by asset type as of December 31, 2015 were At December 31, 2017, the scheduled maturities of time deposits are as follows: Fair values of plan assets $1,643 2018 2019 2020 2021 2022 2023 $171,035 94,418 61,343 41,556 27,032 234 395,617 Equity securities Debt securities Total (12) Employee and Director Benefit Plans Equity securities included $806 (49.1% of plan assets) at December 31, 2015. The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all employees under which they match 50% of eligible employee contributions to a maximum employee contribution of 6% of annual salary. Total 401(k) expense was approximately $310, $300, and $257, for 2017, 2016, and 2015, respectively. Each plan participant elects how the employer contributions are invested; whereby the participants choose between purchasing the Company’s common stock or investing in the plan’s investment funds. In addition, the Company and the Banks maintain non-qualified deferred compensation plans whereby certain directors and officers are provided with guaranteed annual payments for periods ranging after reaching a variation of retirement ages pending participant plan. The compensation plans are funded by bank-owned life insurance policies which had an aggregate death benefit of approximately $53,878 and $53,710 as of December 31, 2017 and 2016, respectively. The Banks accrue amounts to be paid over the participant’s active service life. The accrued benefits were $1,620, $1,061, and $905 at December 31, 2017, 2016, and 2015, respectively. Non- qualified deferred compensation expenses were $639, $206, and $49 in 2017, 2016, and 2015, respectively. The State Bank of Herscher sponsored a defined benefit pension plan that covered substantially all employees that was terminated in 2016. The plan called for benefits to be paid to eligible employees at retirement; based primarily upon years of service with the Company and compensation rates. To be eligible, an employee must have been employed by the Company for a period of one year or more and be 21 years of age or older. Contributions to the plan reflected benefits attributed to employees' services to date as well as services expected to be earned in the future. The plan was funded in accordance with federal laws and regulations. 40 49.1% 50.9% 100% Total $255 806 582 $1,643 The fair values of the Company's pension plan assets by asset category at December 31, 2015 were as follows: Fair Value Measurements Using Quoted Prices Significant in Active Markets (Level 1) Observable Unobservable Inputs (Level 2) Inputs (Level 3) Plan assets: Interest-bearing cash Corporate common stocks Treasury and corporate bonds Total $255 806 582 $1,643 The investment policy included various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected guidelines considering a broad range of economic conditions. Central to the policy were target allocation ranges by major asset categories. The objectives of the target allocations were to maintain investment portfolios that diversified risk through prudent asset allocation parameters, achieved asset returns that met or exceeded the plan's actuarial assumptions, and achieved asset returns that were competitive with like institutions employing similar investment strategies. The investment policy was periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The policy was established and administered in a manner that was compliant at all times with applicable government regulations. The Company acquired the defined benefit pension plan in the State Bank of Herscher business combination. Prior to the acquisition, the benefits of the plan were frozen with the investment plan objectives modified as the assets were transferred to more liquid and less volatile investment types. In February 2015, the State Bank of Herscher’s Board of Directors formally voted for plan termination. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (11) Time Deposits (12) Employee and Director Benefit Plans (continued) The aggregate amount of time deposits with a minimum denomination of $250 was approximately $54,644 and $56,863 at December 31, 2017 and 2016, respectively. Time deposits are included in the interest-bearing A summary of the weighted average asset allocations of plan assets by asset type as of December 31, 2015 were as follows: deposits for financial statement presentation. At December 31, 2017, the scheduled maturities of time deposits are as follows: 2018 2019 2020 2021 2022 2023 Fair values of plan assets $1,643 $171,035 94,418 61,343 41,556 27,032 234 395,617 Equity securities Debt securities Total 49.1% 50.9% 100% (12) Employee and Director Benefit Plans Equity securities included $806 (49.1% of plan assets) at December 31, 2015. The fair values of the Company's pension plan assets by asset category at December 31, 2015 were as follows: Fair Value Measurements Using Quoted Prices in Active Markets (Level 1) Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Plan assets: Interest-bearing cash Corporate common stocks Treasury and corporate bonds Total $255 806 582 $1,643 Total $255 806 582 $1,643 The investment policy included various guidelines and procedures designed to ensure assets are invested in a manner necessary to meet expected guidelines considering a broad range of economic conditions. Central to the policy were target allocation ranges by major asset categories. The objectives of the target allocations were to maintain investment portfolios that diversified risk through prudent asset allocation parameters, achieved asset returns that met or exceeded the plan's actuarial assumptions, and achieved asset returns that were competitive with like institutions employing similar investment strategies. The investment policy was periodically reviewed by the Company and a designated third-party fiduciary for investment matters. The policy was established and administered in a manner that was compliant at all times with applicable government regulations. The Company acquired the defined benefit pension plan in the State Bank of Herscher business combination. Prior to the acquisition, the benefits of the plan were frozen with the investment plan objectives modified as the assets were transferred to more liquid and less volatile investment types. In February 2015, the State Bank of Herscher’s Board of Directors formally voted for plan termination. 41 The Company and the Banks maintain a 401(k) plan with profit sharing features covering substantially all employees under which they match 50% of eligible employee contributions to a maximum employee contribution of 6% of annual salary. Total 401(k) expense was approximately $310, $300, and $257, for 2017, 2016, and 2015, respectively. Each plan participant elects how the employer contributions are invested; whereby the participants choose between purchasing the Company’s common stock or investing in the plan’s investment funds. In addition, the Company and the Banks maintain non-qualified deferred compensation plans whereby certain directors and officers are provided with guaranteed annual payments for periods ranging after reaching a variation of retirement ages pending participant plan. The compensation plans are funded by bank-owned life insurance policies which had an aggregate death benefit of approximately $53,878 and $53,710 as of December 31, 2017 and 2016, respectively. The Banks accrue amounts to be paid over the participant’s active service life. The accrued benefits were $1,620, $1,061, and $905 at December 31, 2017, 2016, and 2015, respectively. Non- qualified deferred compensation expenses were $639, $206, and $49 in 2017, 2016, and 2015, respectively. The State Bank of Herscher sponsored a defined benefit pension plan that covered substantially all employees that was terminated in 2016. The plan called for benefits to be paid to eligible employees at retirement; based primarily upon years of service with the Company and compensation rates. To be eligible, an employee must have been employed by the Company for a period of one year or more and be 21 years of age or older. Contributions to the plan reflected benefits attributed to employees' services to date as well as services expected to be earned in the future. The plan was funded in accordance with federal laws and regulations. 2017 Annual Report Building on the past. Investing in the future. The tax effects of existing temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2017 and 2016 are summarized as follows: Deferred tax assets: Allowance for loan losses Allowance for losses on foreclosed assets Alternative minimum tax Available-for-sale securities Deferred compensation and other Purchase accounting adjustments Total deferred tax assets Deferred tax liabilities: FHLB stock dividend Depreciation Total deferred tax liabilities Net deferred tax assets 2017 2016 $3,753 $6,062 5,161 8,485 60 0 206 764 378 63 1,078 388 1,529 $3,632 114 244 576 690 799 168 825 543 1,536 $6,949 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (12) Employee and Director Benefit Plans (continued) (13) Income Taxes (continued) Because of the imminent liquidation of the plan, the Company did not perform a computation of the benefit plan obligation at December 31, 2015; instead a range of estimates of the obligation for liquidation was computed. Management did not believe the pension benefit obligation at December 31, 2015 materially differed from the liquidation obligation estimates. As there was no certainty on the financial impact of liquidation due to various factors, including plan participant liquidation elections, the range was $1,595 to $2,511. It was estimated the most likely scenario would result in an estimated payout of approximately $1,791 based on a combination of lump sum and annuities. The Company had accrued a liability for the pension benefit liability in excess of plan assets of $168 at December 31, 2015. This included the accrual for costs associated with plan termination totaling $44 as of December 31, 2015. In 2016 and 2017, the Company recorded expenses of $230 and $2, respectively, related to the final benefit expenses and other related costs, including termination. (13) Income Taxes The components of income tax expense (benefit) for the years ended December 31 are as follows: No valuation allowance has been recorded since deferred tax assets are expected to be realized. With few exceptions, the Company is no longer subject to federal or state examinations by tax authorities for years before 2014. Current – federal Current – state Deferred – federal Deferred – state 2017 $1,715 216 1,931 2,723 599 3,321 2016 2015 Mortgage servicing rights and other $614 616 1,230 2,110 574 2,684 $2,542 851 3,393 227 91 318 Total income tax expense $5,253 $3,914 $3,711 A reconciliation of the differences between the statutory federal income tax rate and the effective federal income tax rate with the resulting dollar amounts is shown in the following table: (14) Transactions with Related Parties Statutory federal tax Increase (decrease) in taxes resulting from: Tax-exempt interest Bank-owned life insurance State taxes, net of federal benefit Bargain purchase gain Other Adjustment to the net defered tax asset for the Tax Cuts and Jobs Act 2017 2016 2015 % of Pretax Earnings % of Pretax Earnings Amount % of Pretax Earnings Amount Amount $4,929 34.0% $4,708 34.0% $4,847 34.0% (1,271) (217) (8.8%) (1.5%) 538 0 67 3.7% 0% 0.5% 1,206 8.3% (1,272) (152) 786 0 (156) 0 (9.2%) (1.1%) 5.7% 0% (1.1%) 0.0% (1,270) (80) 622 (385) (23) 0 (9.5%) (0.6%) 4.7% (2.9%) (0.2%) 0.0% The Company and subsidiary banks have had, and may be expected to have in the future, loans or other banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, these loans and transactions were on the same terms as those for comparable loans and transactions with non-related parties. Loans to related parties amounted to approximately $17,761 and $18,753 at December 31, 2017 and 2016, respectively. Activity for related party loans for the year ended December 31, 2017 is as follows: Balance at beginning of year New credits Repayments Participated outside the Company Balance at end of year 2017 2016 2015 $18,753 7,143 0 (8,135) $17,761 $18,933 7,820 (915) (7,085) $21,560 14,108 (1,685) (15,050) $18,753 $18,933 Effective tax rates $5,252 36.2% $3,914 28.3% $3,711 27.9% Deposit accounts from related parties totaled approximately $14,196 and $13,721 at December 31, 2017 and 2016, respectively. 42 2017 Annual Report Community Building Through Community Banking Because of the imminent liquidation of the plan, the Company did not perform a computation of the benefit plan obligation at December 31, 2015; instead a range of estimates of the obligation for liquidation was computed. Management did not believe the pension benefit obligation at December 31, 2015 materially differed from the liquidation obligation estimates. As there was no certainty on the financial impact of liquidation due to various factors, including plan participant liquidation elections, the range was $1,595 to $2,511. It was estimated the most likely scenario would result in an estimated payout of approximately $1,791 based on a combination of lump sum and annuities. The Company had accrued a liability for the pension benefit liability in excess of plan assets of $168 at December 31, 2015. This included the accrual for costs associated with plan termination totaling $44 as of December 31, 2015. In 2016 and 2017, the Company recorded expenses of $230 and $2, respectively, related to the final benefit expenses and other related costs, including termination. The components of income tax expense (benefit) for the years ended December 31 are as follows: (13) Income Taxes Current – federal Current – state Deferred – federal Deferred – state 2017 $1,715 216 1,931 2,723 599 3,321 2016 2015 $614 616 1,230 2,110 574 2,684 $2,542 851 3,393 227 91 318 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (12) Employee and Director Benefit Plans (continued) (13) Income Taxes (continued) The tax effects of existing temporary differences that give rise to significant portions of the deferred tax liabilities and deferred tax assets at December 31, 2017 and 2016 are summarized as follows: Deferred tax assets: Allowance for loan losses Allowance for losses on foreclosed assets Alternative minimum tax Available-for-sale securities Deferred compensation and other Purchase accounting adjustments Total deferred tax assets Deferred tax liabilities: FHLB stock dividend Depreciation Mortgage servicing rights and other Total deferred tax liabilities Net deferred tax assets 2017 2016 $3,753 60 0 206 764 378 5,161 63 1,078 388 1,529 $3,632 $6,062 114 244 576 690 799 8,485 168 825 543 1,536 $6,949 Total income tax expense $5,253 $3,914 $3,711 No valuation allowance has been recorded since deferred tax assets are expected to be realized. With few exceptions, the Company is no longer subject to federal or state examinations by tax authorities for years before 2014. A reconciliation of the differences between the statutory federal income tax rate and the effective federal income tax rate with the resulting dollar amounts is shown in the following table: (14) Transactions with Related Parties Statutory federal tax Increase (decrease) in taxes resulting from: Tax-exempt interest Bank-owned life insurance State taxes, net of federal benefit Bargain purchase gain Other Adjustment to the net defered tax asset for the Tax Cuts and Jobs Act 2017 % of Pretax 2016 2015 % of Pretax % of Pretax Amount Earnings Amount Earnings Amount Earnings $4,929 34.0% $4,708 34.0% $4,847 34.0% (1,271) (217) (8.8%) (1.5%) 538 0 67 3.7% 0% 0.5% 1,206 8.3% (1,272) (152) 786 (156) 0 0 (9.2%) (1.1%) 5.7% 0% (1.1%) 0.0% (1,270) (80) 622 (385) (23) 0 (9.5%) (0.6%) 4.7% (2.9%) (0.2%) 0.0% The Company and subsidiary banks have had, and may be expected to have in the future, loans or other banking transactions in the ordinary course of business with directors, significant stockholders, principal officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties). In management’s opinion, these loans and transactions were on the same terms as those for comparable loans and transactions with non-related parties. Loans to related parties amounted to approximately $17,761 and $18,753 at December 31, 2017 and 2016, respectively. Activity for related party loans for the year ended December 31, 2017 is as follows: Balance at beginning of year New credits Participated outside the Company Repayments Balance at end of year 2017 2016 2015 $18,753 7,143 0 (8,135) $17,761 $18,933 7,820 (915) (7,085) $21,560 14,108 (1,685) (15,050) $18,753 $18,933 Effective tax rates $5,252 36.2% $3,914 28.3% $3,711 27.9% Deposit accounts from related parties totaled approximately $14,196 and $13,721 at December 31, 2017 and 2016, respectively. 43 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (continued) Financial instruments with off-balance-sheet risk: Concentration of credit risk: The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, credit lines, letters of credit, and overdraft protection. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Banks’ exposures to credit losses in the event of nonperformance by the other parties to the financial instruments, for commitments to extend credit, and letters of credit are represented by the contractual amounts of those instruments. The Banks use the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments. A summary of the contractual amounts of the Banks’ exposures to off-balance-sheet risk as of December 31 is approximately as follows: Unused lines of credit and other loan commitments Commercial letters of credits Performance and standby letters of credit 2017 $185,451 176 1,437 $187,064 2016 $203,008 580 2,050 $205,638 Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies; but may include accounts receivable, inventory, crops, livestock, property and equipment, residential real estate, and income-producing commercial properties. Standby, performance and commercial letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. They are considered financial guarantees under FASB guidance. The fair value of these financial guarantees is considered immaterial. The Company participates in the FHLB Mortgage Partnership Finance Program (the "Program"). In addition to entering into forward commitments to sell mortgage loans to a secondary market agency, the Company enters into firm commitments to deliver loans to the FHLB through the Program. Under the Program, loans are funded by the FHLB, and the Company receives an agency fee reported as a component of gain on sale of loans. The Company had no firm commitments outstanding to deliver loans through the Program at December 31, 2017. Once delivered to the Program, the Company provides a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the credit enhancement, the Company is liable for losses on loans delivered to the Program after application of any mortgage insurance and a contractually agreed-upon credit enhancement provided by the Program subject to an agreed-upon maximum. The agreed- upon accumulated credit enhancement provided by the Program totaled $2,642, subject to an agreed-upon maximum. The fee the Company received for this credit enhancement was not material in each of the years ended December 31, 2017, 2016 and 2015. The Company and its subsidiary banks provide several types of loans to customers including real estate, agricultural, commercial, and installment loans. The largest component of loans is secured by residential real estate, commercial real estate, or other interest in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company’s business activities, tends to be geographically concentrated in that the majority of the customer base lies within the surrounding communities served by its subsidiary banks. (16) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $32,434 and $25,107 at December 31, 2017 and 2016, respectively, and are collateralized by U.S. agencies, state and municipal and mortgage-backed investment securities with fair values of approximately $39,943 and $34,459. The weighted-average interest rates on these agreements were 1.05% and 0.45% at December 31, 2017 and 2016, respectively. Securities sold under agreements to repurchase mature on a daily basis. (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings Fixed-rate advances with rates ranging from .91% to 2.05% and .91% to 2.64% and weighted average rates of 1.49% and 1.18% as of December 31, 2017 and 2016, respectively. Interest is payable monthly with principal due at maturity. 2017 2016 $19,000 $13,450 Advances are collateralized by 1-4 family mortgage loans, other qualifying loans and securities. The total amounts of collateral securing FHLB advances were approximately $83,183 and $80,797 as of December 31, 2017 and 2016, respectively. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $944 and $2,846 of FHLB stock owned by the Company at December 31, 2017 and 2016, respectively. The Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary advances generally mature daily and bear interest at a generally approved rate in relation to the federal funds rate. The primary advance interest rate at December 31, 2017 was 200-basis points. Outstanding advances were $0 at December 31, 2017 and 2016. Advances are collateralized by investment securities pledged totaling approximately $9,257 and $10,270 at December 31, 2017 and 2016, respectively, to the Federal Reserve Bank. On July 2, 2015, the Company entered into a $7,000 note with Bankers’ Bank for the purchase of the State Bank of Herscher. The noted is a fixed rate at 4% due July 2, 2020 and is secured by common stock of Company subsidiaries. The balance was $5,663 and $6,273 at December 31, 2017 and 2016, respectively, with payments of $212, consisting of principal and interest, due quarterly. Other borrowings totaled $3,645 and $4,095 at December 31, 2017 and 2016, respectively, and mature from 2018 to 2024, at interest rates ranging from 1.60% to 3.50%. 44 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (15) Financial Instruments with Off-Balance-Sheet Risk and Concentrations (continued) Financial instruments with off-balance-sheet risk: Concentration of credit risk: The Banks are parties to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of their customers. These financial instruments include commitments to extend credit, credit lines, letters of credit, and overdraft protection. They involve, to varying degrees, elements of credit risk in excess of amounts recognized on the consolidated balance sheets. The Banks’ exposures to credit losses in the event of nonperformance by the other parties to the financial instruments, for commitments to extend credit, and letters of credit are represented by the contractual amounts of those instruments. The Banks use the same credit policies in making commitments and issuing letters of credit as they do for on-balance-sheet instruments. A summary of the contractual amounts of the Banks’ exposures to off-balance-sheet risk as of December 31 is approximately as follows: Unused lines of credit and other loan commitments Commercial letters of credits Performance and standby letters of credit 2017 $185,451 176 1,437 $187,064 2016 $203,008 580 2,050 $205,638 Commitments to extend credit are agreements to lend to customers as long as there are no violations of any conditions established in the contracts. Commitments generally have fixed expiration dates or other termination clauses and may require the payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Banks evaluate each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Banks upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies; but may include accounts receivable, inventory, crops, livestock, property and equipment, residential real estate, and income-producing commercial properties. Standby, performance and commercial letters of credit are conditional commitments issued by the Banks to guarantee the performance of a customer to a third party. They are considered financial guarantees under FASB guidance. The fair value of these financial guarantees is considered immaterial. The Company participates in the FHLB Mortgage Partnership Finance Program (the "Program"). In addition to entering into forward commitments to sell mortgage loans to a secondary market agency, the Company enters into firm commitments to deliver loans to the FHLB through the Program. Under the Program, loans are funded by the FHLB, and the Company receives an agency fee reported as a component of gain on sale of loans. The Company had no firm commitments outstanding to deliver loans through the Program at December 31, 2017. Once delivered to the Program, the Company provides a contractually agreed-upon credit enhancement and performs servicing of the loans. Under the credit enhancement, the Company is liable for losses on loans delivered to the Program after application of any mortgage insurance and a contractually agreed-upon credit enhancement provided by the Program subject to an agreed-upon maximum. The agreed- upon accumulated credit enhancement provided by the Program totaled $2,642, subject to an agreed-upon maximum. The fee the Company received for this credit enhancement was not material in each of the years ended December 31, 2017, 2016 and 2015. The Company and its subsidiary banks provide several types of loans to customers including real estate, agricultural, commercial, and installment loans. The largest component of loans is secured by residential real estate, commercial real estate, or other interest in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with a wide variety of credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company’s business activities, tends to be geographically concentrated in that the majority of the customer base lies within the surrounding communities served by its subsidiary banks. (16) Securities Sold Under Agreements to Repurchase Securities sold under agreements to repurchase amounted to $32,434 and $25,107 at December 31, 2017 and 2016, respectively, and are collateralized by U.S. agencies, state and municipal and mortgage-backed investment securities with fair values of approximately $39,943 and $34,459. The weighted-average interest rates on these agreements were 1.05% and 0.45% at December 31, 2017 and 2016, respectively. Securities sold under agreements to repurchase mature on a daily basis. (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings Fixed-rate advances with rates ranging from .91% to 2.05% and .91% to 2.64% and weighted average rates of 1.49% and 1.18% as of December 31, 2017 and 2016, respectively. Interest is payable monthly with principal due at maturity. 2017 2016 $19,000 $13,450 Advances are collateralized by 1-4 family mortgage loans, other qualifying loans and securities. The total amounts of collateral securing FHLB advances were approximately $83,183 and $80,797 as of December 31, 2017 and 2016, respectively. FHLB advances are subject to a prepayment penalty if they are repaid prior to maturity. FHLB advances are also secured by $944 and $2,846 of FHLB stock owned by the Company at December 31, 2017 and 2016, respectively. The Banks participate in the Federal Reserve Bank of Chicago’s Discount Window Lending Program. Primary advances generally mature daily and bear interest at a generally approved rate in relation to the federal funds rate. The primary advance interest rate at December 31, 2017 was 200-basis points. Outstanding advances were $0 at December 31, 2017 and 2016. Advances are collateralized by investment securities pledged totaling approximately $9,257 and $10,270 at December 31, 2017 and 2016, respectively, to the Federal Reserve Bank. On July 2, 2015, the Company entered into a $7,000 note with Bankers’ Bank for the purchase of the State Bank of Herscher. The noted is a fixed rate at 4% due July 2, 2020 and is secured by common stock of Company subsidiaries. The balance was $5,663 and $6,273 at December 31, 2017 and 2016, respectively, with payments of $212, consisting of principal and interest, due quarterly. Other borrowings totaled $3,645 and $4,095 at December 31, 2017 and 2016, respectively, and mature from 2018 to 2024, at interest rates ranging from 1.60% to 3.50%. 45 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings (continued) (19) Fair Value Measurements At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as follows: 2017 2018 2019 2020 2021 2022 and thereafter 2017 2016 $0 16,093 3,750 6,413 250 1,802 $0 6,900 6,202 1,514 7,023 2,179 $28,308 $23,818 be corroborated by observable market data. The Company had federal funds purchased with its main correspondent institutions totaling $8,394 and $1,211 as of December 31, 2017 and 2016, respectively. Federal funds purchased generally mature within one day from transaction date. The weighted average interest rate was 1.6% and .8% as of December 31, 2017 and 2016, respectively. (18) Subordinated Debentures The Company issued $10,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of the Troubled Asset Relief Program. The Debentures mature on August 30, 2019; and the Company may redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in accordance with the contract price limitations. The redemption may be subject to approval by the Federal Reserve and must be on a pro rata basis among all holders. The terms call for interest payments to be made quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the interest will accrue until paid. The Company did not defer any interest payments and there was no deferred interest at December 31, 2017. The agreement contains certain restrictive covenants that are effective if the Company is in default on the debentures. 46 Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices; such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following is a description of valuation methodologies used for assets recorded at fair value: Securities available-for-sale: The fair values of the Company’s securities available-for-sale are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The values determined by matrix pricing are considered Level 2 fair value measurements. Collateral-dependent impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write- downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market- quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. Non-real estate collateral may be valued using an appraisal, net book value of the borrower’s financial statements or aging reports, adjusted or discounted based on management’s expertise and knowledge of the borrower and borrower’s business. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. Foreclosed assets: Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, other real estate is initially measured at fair value (less estimated costs to sell) when it is acquired and may also be measured at fair value (less estimated costs to sell) if it becomes subsequently impaired. The fair value measurement for each property may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (17) Federal Home Loan Bank (FHLB), Federal Reserve Advances and Other Borrowings (continued) (19) Fair Value Measurements At December 31, the scheduled maturities of Federal Home Loan Bank advances and other borrowings are as 2017 2016 $0 16,093 3,750 6,413 250 1,802 $0 6,900 6,202 1,514 7,023 2,179 $28,308 $23,818 follows: 2017 2018 2019 2020 2021 2022 and thereafter 2016, respectively. (18) Subordinated Debentures The Company had federal funds purchased with its main correspondent institutions totaling $8,394 and $1,211 as of December 31, 2017 and 2016, respectively. Federal funds purchased generally mature within one day from transaction date. The weighted average interest rate was 1.6% and .8% as of December 31, 2017 and The Company issued $10,000 of Subordinated Debentures in the fiscal year ended 2012 that qualify as Tier 2 regulatory capital (with certain limitations applicable) for the Company. The Company issued the Subordinated Debentures for capital raising purposes primarily for the redemption of preferred stock as part of the Troubled Asset Relief Program. The Debentures mature on August 30, 2019; and the Company may redeem some or all of the Subordinated Debentures at any time after the third anniversary of their issuance in accordance with the contract price limitations. The redemption may be subject to approval by the Federal Reserve and must be on a pro rata basis among all holders. The terms call for interest payments to be made quarterly in arrears on the last day of March, June, September and December. The annual rate of interest on the Subordinated Debentures is 6.00%. The interest payments can be deferred for so long as the Company or a specific Bank remains subject to any regulatory order limiting or prohibiting the payment of dividends or interest on indebtedness of the Company, including the Debentures. If interest payments are deferred, the interest will accrue until paid. The Company did not defer any interest payments and there was no deferred interest at December 31, 2017. The agreement contains certain restrictive covenants that are effective if the Company is in default on the debentures. Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the Company has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices; such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect the Company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. The following is a description of valuation methodologies used for assets recorded at fair value: Securities available-for-sale: The fair values of the Company’s securities available-for-sale are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities. The values determined by matrix pricing are considered Level 2 fair value measurements. Collateral-dependent impaired loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, fair value adjustments are recorded on these loans to reflect (1) partial write- downs, through charge-offs or specific reserve allowances, that are based on the current appraised or market- quoted value of the underlying collateral or (2) the full charge-off of the loan carrying value. The fair value of collateral dependent impaired loans is generally based on recent real estate appraisals. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification. Non-real estate collateral may be valued using an appraisal, net book value of the borrower’s financial statements or aging reports, adjusted or discounted based on management’s expertise and knowledge of the borrower and borrower’s business. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. Foreclosed assets: Real estate acquired through or in lieu of loan foreclosure are not measured at fair value on a recurring basis. However, other real estate is initially measured at fair value (less estimated costs to sell) when it is acquired and may also be measured at fair value (less estimated costs to sell) if it becomes subsequently impaired. The fair value measurement for each property may be obtained from an independent appraiser or prepared internally. Fair value measurements obtained from independent appraisers generally utilize a market approach based on sales of comparable assets and/or an income approach. Such measurements are usually considered Level 2 measurements. However, management routinely evaluates fair value measurements of independent appraisers by comparing actual selling prices to the most recent appraisals. If management determines significant adjustments should be made to the independent appraisals based on these evaluations, these measurements are considered Level 3 measurements. Fair value measurements prepared internally are based on management's comparisons to sales of comparable assets, but include significant unobservable data and are therefore considered Level 3 measurements. 47 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) (19) Fair Value Measurements (continued) The following table presents the Company’s approximate fair-value hierarchy for the assets measured at fair value as of December 31: The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2017: As of December 31, 2017 Assets measured at fair value on a recurring basis: Assets: Securities available-for-sale Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets Fair Value Measurements at Reporting Date Using (Level 2) (Level 1) (Level 3) Total $273,001 $273,001 $5,243 $1,092 $5,243 $1,092 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $7,439 with specific reserves of $2,196 as of December 31, 2017. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,092, which is comprised of the outstanding balance of $1,304, net of an allowance for losses of $212 as of December 31, 2017. As of December 31, 2016 Assets measured at fair value on a recurring basis: Assets: Securities available-for-sale Fair Value Measurements at Reporting Date Using (Level 2) (Level 1) (Level 3) Total $256,699 $256,699 Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets $7,135 $1,766 $7,135 $1,766 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $11,764 with specific reserves of $4,629 as of December 31, 2016. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,766, which is comprised of the outstanding balance of $2,109, net of an allowance for losses of $343 as of December 31, 2016. 48 Collateral dependent impaired loans, net of specific reserves Valuation Technique Unobservable Input Range Sales comparison Appraised values 10% - 20% Foreclosed assets Sales comparison Appraised values 10% - 20% approach approach FASB guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value (Level 1). Interest-bearing deposits in other banks – term deposits: The carrying amounts are reasonable estimates of fair value (Level 1). Securities: See previous description in this footnote for securities available-for-sale. The fair values of the Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted market value. The carrying amount of equity securities approximates its fair value (Level 3). Loans held for sale: The fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices (Level 2). Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in this footnote (Level 3). Cash surrender value of life insurance: The fair value is based on reported values by insurers (Level 1). Deposits: The fair values disclosed for demand deposits, savings accounts, and certain money market deposits are, by definition, equal to the amount payable on demand at the reporting date (Level 1). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 3). 2017 Annual Report Community Building Through Community Banking value as of December 31: As of December 31, 2017 Assets measured at fair value on a recurring basis: Assets: Securities available-for-sale Assets measured at fair value on a non-recurring basis: Assets: Collateral-dependent impaired loans Foreclosed assets Fair Value Measurements at Reporting Date Using Total (Level 1) (Level 2) (Level 3) $273,001 $273,001 $5,243 $1,092 $5,243 $1,092 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $7,439 with specific reserves of $2,196 as of December 31, 2017. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,092, which is comprised of the outstanding balance of $1,304, net of an allowance for Fair Value Measurements at Reporting Date Using Total (Level 1) (Level 2) (Level 3) losses of $212 as of December 31, 2017. As of December 31, 2016 Assets measured at fair value on a recurring basis: Assets: Assets measured at fair value on a non-recurring basis: Assets: Securities available-for-sale $256,699 $256,699 Collateral-dependent impaired loans Foreclosed assets $7,135 $1,766 $7,135 $1,766 Collateral-dependent impaired loans, which are measured for impairment using the fair value of collateral, had a carrying value of $11,764 with specific reserves of $4,629 as of December 31, 2016. Foreclosed assets, which are measured at the lower of carrying or fair value less costs to sell, were carried at their fair value of $1,766, which is comprised of the outstanding balance of $2,109, net of an allowance for losses of $343 as of December 31, 2016. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) (19) Fair Value Measurements (continued) The following table presents the Company’s approximate fair-value hierarchy for the assets measured at fair The following table presents quantitative information about level 3 fair value measurements for financial instruments measured at fair value on a non-recurring basis at December 31, 2017: Collateral dependent impaired loans, net of specific reserves Foreclosed assets Valuation Technique Unobservable Input Range Sales comparison approach Sales comparison approach Appraised values 10% - 20% Appraised values 10% - 20% FASB guidance requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates may not be realized in immediate settlement of the instrument. Accounting guidance excludes certain financial instruments and certain nonfinancial instruments from its disclosure requirements. These fair value disclosures may not represent the fair value of the Company. The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: Cash and cash equivalents: The carrying amounts are reasonable estimates of fair value (Level 1). Interest-bearing deposits in other banks – term deposits: The carrying amounts are reasonable estimates of fair value (Level 1). Securities: See previous description in this footnote for securities available-for-sale. The fair values of the Company’s securities held-to-maturity are primarily determined by matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities, but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2). Non-marketable equity securities: No ready market exists for the equity securities as they have no quoted market value. The carrying amount of equity securities approximates its fair value (Level 3). Loans held for sale: The fair values of loans held for sale are based on commitments on hand from investors or prevailing market prices (Level 2). Loans: For variable-rate loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For fair value estimates for collateral-dependent impaired loans, see previous description in this footnote (Level 3). Cash surrender value of life insurance: The fair value is based on reported values by insurers (Level 1). Deposits: The fair values disclosed for demand deposits, savings accounts, and certain money market deposits are, by definition, equal to the amount payable on demand at the reporting date (Level 1). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits (Level 3). 49 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) (20) Stock-Compensation Plans (continued) Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of federal funds and securities sold under agreements to repurchase approximate fair value (Level 2). FHLB advances and other borrowings: The fair value of FHLB advances was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 3). The fair value of other borrowings is assumed to be materially similar to the carrying value. Subordinated debentures: The fair value of subordinated debentures approximates their fair value based on the Company’s current incremental borrowing rate approximating the instruments current fixed rate (Level 3). Accrued interest: The carrying amounts of accrued interest approximate their fair value (Level 1). Off-balance-sheet financial instruments: No estimated fair value is attributable to unused lines of credit and letters of credit as they are deemed immaterial (Level 3). The estimated fair values of the Company’s financial instruments as of December 31 are as follows: December 31, 2017 Fair Value Carrying Amount December 31, 2016 Carrying Amount Fair Value No options were granted for the year ended December 31, 2017, 2016 and 2015. For the years ended December 31, 2017, 2016 and 2015, the Company recognized $18, $24 and $75 in compensation expense for stock options, respectively. No tax benefits were recognized for the three-year period ended December 31, 2017. The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $472, $280 and $284, respectively. The following tables summarize the activity of options and non-vested shares granted, exercised, or forfeited for the year ended December 31, 2017: Weighted Average Exercise Options Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value Shares under option, beginning of year Granted during the year Forfeited and expired during the year Exercised during the year 105,792 0 (10,000) (23,050) $12.34 4.5 19.00 10.28 Shares under option, end of year 72,742 $12.08 Options exercisable, end of year 72,742 $12.08 3.4 3.4 $1,842 0 125 472 $1,478 $1,478 Shares available for grant, end of year 108,685 Non-vested options, December 31, 2016 Granted during the year Vested during the year, net Forfeited or expired during the year Non-vested options, December 31, 2017 Number of Options Weighted Average Fair Value at Grant 15,000 0 (5,000) (10,000) 0 $4.88 0 4.88 4.88 $4.88 $38,395 10,672 273,817 950 2,339 772,725 5,881 $38,861 $38,861 10,607 257,431 2,852 2,217 766,481 5,719 10,607 257,477 2,852 2,217 765,728 5,719 22,168 22,168 21,525 21,525 10,672 273,767 950 2,339 777,920 5,881 $566,042 395,617 8,394 $38,395 Financial assets: Cash and cash equivalents Interest-bearing deposits in other banks- term deposits Securities Non-marketable equity securities Loans held for sale Loans, net of allowance Accrued interest receivable Cash surrender value of bank-owned life Insurance Financial liabilities: Demand and saving deposits Time deposits Federal funds purchased Securities sold under agreements to repurchase FHLB advances and other borrowings Subordinated Debentures Accrued interest payable $566,042 393,710 8,394 32,405 28,245 10,000 843 $562,287 399,198 1,211 25,107 23,818 10,000 818 $562,287 403,484 1,211 25,107 23,781 10,000 818 32,434 28,308 10,000 843 (20) Stock-Compensation Plans The fair value of each option award is estimated on the date of grant using a closed form option valuation model (Black-Scholes) based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield in effect at the time of the grant. 50 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (19) Fair Value Measurements (continued) (20) Stock-Compensation Plans (continued) Federal funds purchased and securities sold under agreements to repurchase: The carrying amounts of federal funds No options were granted for the year ended December 31, 2017, 2016 and 2015. and securities sold under agreements to repurchase approximate fair value (Level 2). For the years ended December 31, 2017, 2016 and 2015, the Company recognized $18, $24 and $75 in compensation expense for stock options, respectively. No tax benefits were recognized for the three-year period ended December 31, 2017. The intrinsic value of options exercised during the years ended December 31, 2017, 2016 and 2015 was $472, $280 and $284, respectively. The following tables summarize the activity of options and non-vested shares granted, exercised, or forfeited for the year ended December 31, 2017: Shares under option, beginning of year Granted during the year Forfeited and expired during the year Exercised during the year Weighted Average Exercise Price Weighted Average Remaining Contractual Term $12.34 4.5 19.00 10.28 Options 105,792 0 (10,000) (23,050) Shares under option, end of year 72,742 $12.08 Options exercisable, end of year 72,742 $12.08 3.4 3.4 Aggregate Intrinsic Value $1,842 0 125 472 $1,478 $1,478 $38,395 $38,395 $38,861 $38,861 Shares available for grant, end of year 108,685 Non-vested options, December 31, 2016 Granted during the year Vested during the year, net Forfeited or expired during the year Non-vested options, December 31, 2017 Number of Options Weighted Average Fair Value at Grant 15,000 0 (5,000) (10,000) 0 $4.88 0 4.88 4.88 $4.88 FHLB advances and other borrowings: The fair value of FHLB advances was estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements (Level 3). The fair value of other borrowings is assumed to be materially similar to the Subordinated debentures: The fair value of subordinated debentures approximates their fair value based on the Company’s current incremental borrowing rate approximating the instruments current fixed rate carrying value. (Level 3). Accrued interest: The carrying amounts of accrued interest approximate their fair value (Level 1). Off-balance-sheet financial instruments: No estimated fair value is attributable to unused lines of credit and letters of credit as they are deemed immaterial (Level 3). The estimated fair values of the Company’s financial instruments as of December 31 are as follows: December 31, 2017 December 31, 2016 Carrying Amount Fair Value Carrying Amount Fair Value Financial assets: Cash and cash equivalents Interest-bearing deposits in other banks- term deposits Securities Non-marketable equity securities Loans held for sale Loans, net of allowance Accrued interest receivable Cash surrender value of bank-owned life Insurance Financial liabilities: Demand and saving deposits Time deposits Federal funds purchased Securities sold under agreements to repurchase FHLB advances and other borrowings Subordinated Debentures Accrued interest payable 10,672 273,767 950 2,339 777,920 5,881 $566,042 395,617 8,394 32,434 28,308 10,000 843 22,168 22,168 21,525 21,525 10,672 273,817 950 2,339 772,725 5,881 $566,042 393,710 8,394 32,405 28,245 10,000 843 10,607 257,431 2,852 2,217 766,481 5,719 $562,287 399,198 1,211 25,107 23,818 10,000 818 10,607 257,477 2,852 2,217 765,728 5,719 $562,287 403,484 1,211 25,107 23,781 10,000 818 (20) Stock-Compensation Plans The fair value of each option award is estimated on the date of grant using a closed form option valuation model (Black-Scholes) based on the assumptions noted in the table below. Expected volatilities are based on historical volatilities of the Company’s common stock. The Company uses historical data to estimate option exercise and post-vesting termination behavior. The expected term of options granted is based on historical data and represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield in effect at the time of the grant. 51 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans (continued) (22) Earnings Per Common Share The following table summarizes information about stock options outstanding at December 31, 2017: For the years ended December 31, earnings per common share have been computed based on the following: Net income Net income available to common stockholders 2017 2016 2015 $9,245 $9,245 $9,933 $9,933 $10,544 $10,544 Average number of common shares outstanding Effect of dilutive options 3,656,234 45,234 3,633,278 51,468 3,633,369 60,796 Average number of common shares outstanding used to calculate diluted earnings per common share 3,701,469 3,684,746 3,694,165 (23) Regulatory Matters The Company and Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital-adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiaries to maintain minimum regulatory capital amounts and ratios (set forth in the following table). Management believes that as of December 31, 2017, the Company and the Banks meet all capital-adequacy requirements to which they are subject. As of December 31, 2017, all six Banks were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum capital ratios set forth in the table must be maintained. There are no conditions or events occuring since December 31, 2017, which management believes have changed the capital categories of the Banks. Exercise Price $10.00 $10.25 $10.50 $19.00 Number Outstanding 1,250 46,492 10,000 15,000 72,742 Remaining Contractual Life (Years) 0.0 2.8 2.6 6.2 Number Exercisable 1,250 46,492 10,000 15,000 72,742 During 2012, the Company approved an equity incentive plan to promote the long-term financial success of the Company through stock based awards to employees, directors or service providers who contribute to that success. This equity incentive plan permits Company management to approve and grant a maximum of 150,000 shares of common stock-based awards in the form of any combination of stock options, stock appreciation rights, stock awards or cash incentive awards. The following table summarizes information regarding unvested restricted stock and shares outstanding during the year ended 2017: Restricted stock, December 31, 2016 Granted during the year Forfeited during the year Restricted shares (net for taxes) Vested during the year Unvested Shares Weighted Average Grant Value 11,938 6,153 (1,690) (945) (6,829) $23.61 31.35 27.34 23.05 23.05 Restricted stock, December 31, 2017 8,627 $28.90 During 2017, 2016 and 2015, total compensation expense of $165, $178, and $142 (before tax benefits of $66, $70 and $57) was recorded from amortization of restricted shares expected to vest, respectively. Future projected compensation expense (before tax benefits); assuming all restricted shares eventually vest to employees; would be $92 and $21 for years 2018 and 2019, respectively. (21) Stock Repurchase Program In October 2016, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 shares of common stock at market price, each year. In October 2017, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 of common stock at up to 110% of book value. For the year ended December 31, 2016, the Company had repurchased 21,300 shares under this program. There were no shares repurchased in 2017. The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity as treasury stock. 52 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (20) Stock-Compensation Plans (continued) (22) Earnings Per Common Share The following table summarizes information about stock options outstanding at December 31, 2017: For the years ended December 31, earnings per common share have been computed based on the following: Exercise Price Number Outstanding Number Exercisable Net income Net income available to common stockholders 2017 2016 2015 $9,245 $9,245 $9,933 $9,933 $10,544 $10,544 Average number of common shares outstanding Effect of dilutive options 3,656,234 45,234 3,633,278 51,468 3,633,369 60,796 Average number of common shares outstanding used to calculate diluted earnings per common share 3,701,469 3,684,746 3,694,165 (23) Regulatory Matters The Company and Banks are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital-adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Banks must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Company and its subsidiaries to maintain minimum regulatory capital amounts and ratios (set forth in the following table). Management believes that as of December 31, 2017, the Company and the Banks meet all capital-adequacy requirements to which they are subject. As of December 31, 2017, all six Banks were categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, minimum capital ratios set forth in the table must be maintained. There are no conditions or events occuring since December 31, 2017, which management believes have changed the capital categories of the Banks. 53 $10.00 $10.25 $10.50 $19.00 1,250 46,492 10,000 15,000 72,742 Remaining Contractual Life (Years) 0.0 2.8 2.6 6.2 1,250 46,492 10,000 15,000 72,742 During 2012, the Company approved an equity incentive plan to promote the long-term financial success of the Company through stock based awards to employees, directors or service providers who contribute to that success. This equity incentive plan permits Company management to approve and grant a maximum of 150,000 shares of common stock-based awards in the form of any combination of stock options, stock appreciation rights, stock awards or cash incentive awards. The following table summarizes information regarding unvested restricted stock and shares outstanding during the year ended 2017: Restricted stock, December 31, 2016 Granted during the year Forfeited during the year Restricted shares (net for taxes) Vested during the year Unvested Shares Weighted Average Grant Value 11,938 6,153 (1,690) (945) (6,829) $23.61 31.35 27.34 23.05 23.05 Restricted stock, December 31, 2017 8,627 $28.90 During 2017, 2016 and 2015, total compensation expense of $165, $178, and $142 (before tax benefits of $66, $70 and $57) was recorded from amortization of restricted shares expected to vest, respectively. Future projected compensation expense (before tax benefits); assuming all restricted shares eventually vest to employees; would be $92 and $21 for years 2018 and 2019, respectively. (21) Stock Repurchase Program In October 2016, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 shares of common stock at market price, each year. In October 2017, the Company’s Board of Directors authorized a stock repurchase program authorizing an aggregate repurchase of up to 100,000 of common stock at up to 110% of book value. For the year ended December 31, 2016, the Company had repurchased 21,300 shares under this program. There were no shares repurchased in 2017. The purchase price for the shares of the Company’s stock repurchased is reflected as a reduction to shareholders’ equity as treasury stock. 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) (23) Regulatory Matters (continued) The actual capital amounts and ratios for the Company and Banks as of December 31 are presented in the following tables: Amount In $000s Actual Ratio Minimum Capital Requirement Amount In $000s Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount In $000s Ratio $130,386 28,941 24,384 17,545 27,310 10,621 19,571 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 14.04% 12.26% 12.67% 14.13% 13.73% 15.45% 19.93% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 10.05% 9.56% 9.30% 9.90% 10.17% 11.43% 12.84% $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $55,717 14,165 11,545 7,449 11,936 4,125 5,893 $41,788 10,624 8,659 5,587 8,952 3,094 4,420 $46,491 11,200 9,622 6,461 9,759 3,416 5,709 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $92,862 23,608 19,242 12,415 19,894 6,875 9,822 $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $60,360 15,345 12,507 8,070 12,931 4,469 6,384 $58,114 14,000 12,027 8,076 12,199 4,270 7,136 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% As of December 31, 2017: Total Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Common Equity Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Company Northwest German Davis Freeport Lena Herscher 54 $122,145 27,991 23,072 16,621 25,943 10,268 17,949 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 13.48% 12.66% 12.43% 12.63% 13.21% 13.78% 19.58% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 9.42% 9.42% 9.14% 9.24% 9.99% 10.03% 11.93% $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $54,358 13,270 11,134 7,895 11,788 4,470 5,501 $40,768 9,952 8,351 5,921 8,841 3,352 4,126 $45,338 10,706 9,220 6,479 9,396 3,719 5,623 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $90,596 22,116 18,557 13,158 19,646 7,450 9,169 $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $58,887 14,376 12,062 8,553 12,770 4,482 5,960 $56,673 13,383 11,526 8,099 11,745 4,649 7,028 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% As of December 31, 2016: Total Capital to Risk Weighted Assets: Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Common Equity Tier 1 Capital to Risk Weighted Assets: (24) Dividends declaration of dividends. (25) Lease Commitments State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any One of the Banks has operating lease commitments on office space in Loves Park, Illinois. The terms of the Perryville lease location requires base lease amounts of approximately $80 per year. The lease expired September 2016 and was renewed for an additional year and remains renewable up to two additional one-year terms. The terms of North Second lease location requires base lease amounts of approximately $34 per year. The lease expires September 2020 and is renewable up to two additional five-year terms. Rent expense of $122 and $120 was recognized in 2017 and 2016, respectively. 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (23) Regulatory Matters (continued) (23) Regulatory Matters (continued) The actual capital amounts and ratios for the Company and Banks as of December 31 are presented in the following tables: Amount In $000s Actual Ratio Minimum Capital Requirement Amount In $000s Ratio Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions Amount In $000s Ratio $130,386 28,941 24,384 17,545 27,310 10,621 19,571 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 $116,759 26,777 22,366 15,990 24,812 9,756 18,328 14.04% 12.26% 12.67% 14.13% 13.73% 15.45% 19.93% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 12.57% 11.34% 11.62% 12.88% 12.47% 14.19% 18.66% 10.05% 9.56% 9.30% 9.90% 10.17% 11.43% 12.84% $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $55,717 14,165 11,545 7,449 11,936 4,125 5,893 $41,788 10,624 8,659 5,587 8,952 3,094 4,420 $46,491 11,200 9,622 6,461 9,759 3,416 5,709 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $92,862 23,608 19,242 12,415 19,894 6,875 9,822 $74,289 18,886 15,394 9,932 15,915 5,500 7,857 $60,360 15,345 12,507 8,070 12,931 4,469 6,384 $58,114 14,000 12,027 8,076 12,199 4,270 7,136 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% As of December 31, 2017: Total Capital to Risk Weighted Assets: Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Common Equity Tier 1 Capital to Risk Weighted Assets: As of December 31, 2016: Total Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Common Equity Tier 1 Capital to Risk Weighted Assets: Company Northwest German Davis Freeport Lena Herscher Tier 1 Capital to Average Assets: Company Northwest German Davis Freeport Lena Herscher $122,145 27,991 23,072 16,621 25,943 10,268 17,949 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 $106,769 25,220 21,064 14,970 23,469 9,327 16,772 13.48% 12.66% 12.43% 12.63% 13.21% 13.78% 19.58% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 11.79% 11.40% 11.35% 11.38% 11.95% 12.52% 18.29% 9.42% 9.42% 9.14% 9.24% 9.99% 10.03% 11.93% $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $54,358 13,270 11,134 7,895 11,788 4,470 5,501 $40,768 9,952 8,351 5,921 8,841 3,352 4,126 $45,338 10,706 9,220 6,479 9,396 3,719 5,623 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% 4.00% $90,596 22,116 18,557 13,158 19,646 7,450 9,169 $72,477 17,693 14,846 10,526 15,717 5,960 7,335 $58,887 14,376 12,062 8,553 12,770 4,482 5,960 $56,673 13,383 11,526 8,099 11,745 4,649 7,028 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 8.00% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 6.50% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% (24) Dividends State banking regulations restrict the amount of dividends that a bank may pay to its stockholders. The regulations provide that dividends are limited to the balance of undivided profits, subject to capital-adequacy requirements, plus an additional amount equal to the bank’s current-year earnings through the date of any declaration of dividends. (25) Lease Commitments One of the Banks has operating lease commitments on office space in Loves Park, Illinois. The terms of the Perryville lease location requires base lease amounts of approximately $80 per year. The lease expired September 2016 and was renewed for an additional year and remains renewable up to two additional one-year terms. The terms of North Second lease location requires base lease amounts of approximately $34 per year. The lease expires September 2020 and is renewable up to two additional five-year terms. Rent expense of $122 and $120 was recognized in 2017 and 2016, respectively. 55 2017 Annual Report Building on the past. Investing in the future. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (27) State Bank of Herscher Acquisition (continued) The following table presents pro forma information as if the acquisition had occurred at the beginning of 2015. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates. Net interest income Net income Basic earnings per share Diluted earnings per share 2015 $34,561 $10,102 $2.78 $2.73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (25) Lease Commitments (continued) (25) Lease Commitments (continued) In addition, there is an operating lease agreement for bank premises in Kankakee, Illinois. There was no In addition, there is an operating lease agreement for bank premises in Kankakee, Illinois. There was no formal lease for the Kankakee location in 2017. The Bank paid $7 for 2017. A formal lease agreement was formal lease for the Kankakee location in 2017. The Bank paid $7 for 2017. A formal lease agreement was signed for 2018 for the Kankakee location. The terms of the 2018 lease require base lease amount of $10; signed for 2018 for the Kankakee location. The terms of the 2018 lease require base lease amount of $10; which has been prepaid. which has been prepaid. The minimum lease commitments on all leases is $105 for 2018. The minimum lease commitments on all leases is $105 for 2018. (26) Qualified Affordable Housing Project Investments (26) Qualified Affordable Housing Project Investments The Company invests in qualified affordable housing projects. At December 31, 2017 and 2016, the balance The Company invests in qualified affordable housing projects. At December 31, 2017 and 2016, the balance of the investment for qualified affordable housing projects was $1,857 and $2,215. These balances are of the investment for qualified affordable housing projects was $1,857 and $2,215. These balances are reflected in the other assets line on the consolidated balance sheets. reflected in the other assets line on the consolidated balance sheets. (27) State Bank of Herscher Acquisition (27) State Bank of Herscher Acquisition On July 2, 2015, the Company purchased 100% of the outstanding common shares of the State Bank of On July 2, 2015, the Company purchased 100% of the outstanding common shares of the State Bank of Herscher. As a result of the acquisition, the Company expects to offer its expanded line of bank products Herscher. As a result of the acquisition, the Company expects to offer its expanded line of bank products and services to State Bank of Herscher’s existing and prospective customers while reducing administrative and services to State Bank of Herscher’s existing and prospective customers while reducing administrative costs through economies of scale. The Company was able to purchase State Bank of Herscher at a bargain costs through economies of scale. The Company was able to purchase State Bank of Herscher at a bargain purchase price primarily because the credit quality of State Bank of Herscher’s loan portfolio shows purchase price primarily because the credit quality of State Bank of Herscher’s loan portfolio shows significant deterioration. A bargain purchase gain of $1,133 was recognized in other noninterest income on significant deterioration. A bargain purchase gain of $1,133 was recognized in other noninterest income on the consolidated statements of income for the year ended December 31, 2015. Consideration paid for the net the consolidated statements of income for the year ended December 31, 2015. Consideration paid for the net assets acquired included $1 of cash. Costs related to the acquisition are included in other noninterest expense assets acquired included $1 of cash. Costs related to the acquisition are included in other noninterest expense on the consolidated statements of income and totaled $206 for the year ended December 31, 2015. on the consolidated statements of income and totaled $206 for the year ended December 31, 2015. Recognized amounts of identifiable assets acquired and liabilities assumed: Recognized amounts of identifiable assets acquired and liabilities assumed: Cash and cash equivalents Cash and cash equivalents Securities Securities Loans Loans Premise and equipment Premise and equipment Core deposit intangibles Core deposit intangibles Foreclosed assets Foreclosed assets Other assets Other assets Total assets acquired Total assets acquired Deposits Deposits Other liabilities Other liabilities Total Liabilities assumed Total Liabilities assumed Bargain purchase gain Bargain purchase gain Total Total 2015 2015 $23,756 $23,756 32,798 32,798 56,810 56,810 2,033 2,033 1,952 1,952 2,635 2,635 8,232 8,232 $128,216 $128,216 124,748 124,748 2,335 2,335 127,083 127,083 1,133 1,133 $128,216 $128,216 The fair value of net assets includes fair value adjustments to certain receivables that were not considered The fair value of net assets includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. of credit deterioration since origination. 56 2017 Annual Report Community Building Through Community Banking NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) (000s omitted except share data) (25) Lease Commitments (continued) (25) Lease Commitments (continued) In addition, there is an operating lease agreement for bank premises in Kankakee, Illinois. There was no In addition, there is an operating lease agreement for bank premises in Kankakee, Illinois. There was no formal lease for the Kankakee location in 2017. The Bank paid $7 for 2017. A formal lease agreement was formal lease for the Kankakee location in 2017. The Bank paid $7 for 2017. A formal lease agreement was signed for 2018 for the Kankakee location. The terms of the 2018 lease require base lease amount of $10; signed for 2018 for the Kankakee location. The terms of the 2018 lease require base lease amount of $10; which has been prepaid. which has been prepaid. The minimum lease commitments on all leases is $105 for 2018. The minimum lease commitments on all leases is $105 for 2018. The following table presents pro forma information as if the acquisition had occurred at the beginning of 2015. The pro forma information includes adjustments for interest income on loans and securities acquired, amortization of intangibles arising from the transaction, depreciation expense on property acquired, interest expense on deposits acquired, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transactions been effected on the assumed dates. (27) State Bank of Herscher Acquisition (continued) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (000s omitted except share data) Net interest income Net income Basic earnings per share Diluted earnings per share 2015 $34,561 $10,102 $2.78 $2.73 (26) Qualified Affordable Housing Project Investments (26) Qualified Affordable Housing Project Investments The Company invests in qualified affordable housing projects. At December 31, 2017 and 2016, the balance The Company invests in qualified affordable housing projects. At December 31, 2017 and 2016, the balance of the investment for qualified affordable housing projects was $1,857 and $2,215. These balances are of the investment for qualified affordable housing projects was $1,857 and $2,215. These balances are reflected in the other assets line on the consolidated balance sheets. reflected in the other assets line on the consolidated balance sheets. (27) State Bank of Herscher Acquisition (27) State Bank of Herscher Acquisition On July 2, 2015, the Company purchased 100% of the outstanding common shares of the State Bank of On July 2, 2015, the Company purchased 100% of the outstanding common shares of the State Bank of Herscher. As a result of the acquisition, the Company expects to offer its expanded line of bank products Herscher. As a result of the acquisition, the Company expects to offer its expanded line of bank products and services to State Bank of Herscher’s existing and prospective customers while reducing administrative and services to State Bank of Herscher’s existing and prospective customers while reducing administrative costs through economies of scale. The Company was able to purchase State Bank of Herscher at a bargain costs through economies of scale. The Company was able to purchase State Bank of Herscher at a bargain purchase price primarily because the credit quality of State Bank of Herscher’s loan portfolio shows purchase price primarily because the credit quality of State Bank of Herscher’s loan portfolio shows significant deterioration. A bargain purchase gain of $1,133 was recognized in other noninterest income on significant deterioration. A bargain purchase gain of $1,133 was recognized in other noninterest income on the consolidated statements of income for the year ended December 31, 2015. Consideration paid for the net the consolidated statements of income for the year ended December 31, 2015. Consideration paid for the net assets acquired included $1 of cash. Costs related to the acquisition are included in other noninterest expense assets acquired included $1 of cash. Costs related to the acquisition are included in other noninterest expense on the consolidated statements of income and totaled $206 for the year ended December 31, 2015. on the consolidated statements of income and totaled $206 for the year ended December 31, 2015. Recognized amounts of identifiable assets acquired and liabilities assumed: Recognized amounts of identifiable assets acquired and liabilities assumed: Cash and cash equivalents Cash and cash equivalents Securities Securities Loans Loans Premise and equipment Premise and equipment Core deposit intangibles Core deposit intangibles Foreclosed assets Foreclosed assets Other assets Other assets Total assets acquired Total assets acquired Deposits Deposits Other liabilities Other liabilities Total Liabilities assumed Total Liabilities assumed Bargain purchase gain Bargain purchase gain Total Total 2015 2015 $23,756 $23,756 32,798 32,798 56,810 56,810 2,033 2,033 1,952 1,952 2,635 2,635 8,232 8,232 $128,216 $128,216 124,748 124,748 2,335 2,335 127,083 127,083 1,133 1,133 $128,216 $128,216 The fair value of net assets includes fair value adjustments to certain receivables that were not considered The fair value of net assets includes fair value adjustments to certain receivables that were not considered impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual impaired as of the acquisition date. The fair value adjustments were determined using discounted contractual cash flows. However, the Company believes that all contractual cash flows related to these financial cash flows. However, the Company believes that all contractual cash flows related to these financial instruments will be collected. As such, these receivables were not considered impaired at the acquisition date instruments will be collected. As such, these receivables were not considered impaired at the acquisition date and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence and were not subject to the guidance relating to purchased credit impaired loans, which have shown evidence of credit deterioration since origination. of credit deterioration since origination. 57 2017 Annual Report Building on the past. Investing in the future. CONSOLIDATING SCHEDULE 1 - BALANCE SHEET CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) (000s omitted except share data) December 31, 2017 December 31, 2017 A S S E T S A S S E T S German-American State Bank State Bank German-American of Davis State Bank State Bank Northwest Bank of Davis Northwest Bank State Bank State Lena Lena State Bank Foresight Financial State Bank Foresight Financial Consolidated Consolidated Bank State Bank State Bank of Herscher of Herscher Group, Inc. Group, Inc. Eliminations Eliminations Total Total Cash and due from banks Cash and due from banks Interest-bearing deposits in banks Interest-bearing deposits in banks Federal funds sold Federal funds sold Interest-bearing deposits in banks - term deposits Interest-bearing deposits in banks - term deposits Securities: Securities: Securities held-to-maturity Securities held-to-maturity Securities available-for-sale Securities available-for-sale Non-marketable equity securities, at cost Non-marketable equity securities, at cost Loans held for sale Loans held for sale Loans, net Loans, net Foreclosed assets, net Foreclosed assets, net Premises and equipment Premises and equipment Core deposit intangible Core deposit intangible Bank owned life insurance Bank owned life insurance Other assets Other assets Investment in subsidiary banks Investment in subsidiary banks $4,415 6 0 3,477 0 58,263 191 0 166,614 93 1,263 0 3,158 3,177 0 $1,794 $4,415 236 6 0 0 3,488 3,477 0 766 42,097 58,263 103 191 0 0 102,582 166,614 296 93 920 1,263 0 0 1,824 3,158 3,599 3,177 0 0 $1,794 236 0 3,488 $8,157 147 0 0 0 766 48,372 42,097 262 103 2,339 0 206,151 102,582 234 296 4,763 920 0 0 6,185 1,824 5,113 3,599 0 0 $8,157 $5,833 147 3,524 0 4,122 0 3,453 0 0 48,372 53,168 262 148 2,339 0 0 0 234 0 6,185 1,411 5,113 2,969 0 0 $5,833 $1,238 3,524 89 4,122 512 3,453 1,088 0 0 53,168 23,421 148 60 0 0 0 0 0 0 1,411 2,312 2,969 1,268 0 0 $1,238 $2,897 89 118 512 0 1,088 4,473 0 0 23,421 47,680 60 186 0 0 0 469 417 1,948 0 1,223 2,312 4,355 1,268 2,543 0 0 0 0 0 0 0 0 0 0 $2,897 $291 118 6,653 4,473 0 0 47,680 186 0 469 1,948 5,357 1,223 4,355 2,923 2,543 418 116,010 0 206,151 171,135 171,135 55,007 55,007 76,284 76,284 147 4,763 1,652 1,652 417 $291 ($291) 6,653 (1,346) (5,307) 0 ($291) $24,334 (1,346) $9,427 4,634 (5,307) 10,672 $24,334 $9,427 4,634 10,672 766 273,001 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 766 273,001 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 116,010 (116,010) (116,010) Total assets Total assets $240,657 $240,657 $157,705 $157,705 $281,723 $281,723 $247,415 $247,415 $85,412 $85,412 $142,176 $142,176 $131,799 $131,799 ($122,954) ($122,954) $1,163,933 $1,163,933 LIABILITIES AND STOCKHOLDLERS' EQUITY LIABILITIES AND STOCKHOLDLERS' EQUITY Liabilities: Deposits: Noninterest bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank borrowings and other Subordinated debentures Accrued interest payable and other liabilities Liabilities: Deposits: Noninterest bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank borrowings and other Subordinated debentures Accrued interest payable and other liabilities $27,534 183,925 211,459 1,063 4,500 0 1,278 $27,534 183,925 211,459 1,063 $14,214 111,310 125,524 1,972 13,639 0 0 352 4,500 0 1,278 $40,848 $14,214 194,481 111,310 235,329 125,524 2,967 1,972 2,404 13,639 13,183 0 0 0 1,169 352 $26,579 $40,848 194,481 235,329 177,563 204,142 2,967 0 2,404 14,619 13,183 2,962 0 0 1,169 865 $26,579 $6,175 177,563 68,013 204,142 74,188 14,619 2,962 1,000 0 0 0 0 0 865 484 $6,175 $22,638 68,013 95,323 74,188 117,961 0 2,392 0 1,772 1,000 1,000 0 0 484 371 $22,638 95,323 117,961 2,392 1,772 $0 0 $0 0 0 1,000 5,663 10,000 0 371 1,237 $0 ($291) (6,653) 0 $0 (6,944) 5,663 10,000 1,237 ($291) $137,697 (6,653) 823,962 (6,944) 961,659 8,394 32,434 28,308 10,000 5,756 $137,697 823,962 961,659 8,394 32,434 28,308 10,000 5,756 Total liabilities Total liabilities 218,300 218,300 141,487 141,487 255,052 255,052 222,588 222,588 75,672 75,672 123,496 123,496 16,900 16,900 (6,944) (6,944) 1,046,551 1,046,551 Stockholders’ equity: Stockholders’ equity: Preferred stock Preferred stock Common stock Common stock Additional paid-in capital Additional paid-in capital Retained earnings Retained earnings Treasury stock Treasury stock Accumulated other comprehensive income (loss) Accumulated other comprehensive income (loss) 0 400 2,885 19,081 0 (9) 0 0 100 400 1,628 2,885 14,262 19,081 0 0 228 (9) 0 0 1,450 100 7,330 1,628 17,997 14,262 0 0 (106) 228 0 0 1,450 1,000 7,330 4,672 17,997 19,139 0 0 (106) 16 0 0 1,000 500 4,672 3,727 19,139 5,530 0 0 16 (17) 0 0 500 400 3,727 28,443 5,530 (7,058) 0 0 (17) (3,105) 0 0 400 995 28,443 9,409 (7,058) 113,810 (6,320) 0 (3,105) (2,995) 995 (3,850) 9,409 (48,684) 113,810 (68,950) (6,320) (2,995) 5,474 0 (3,850) 995 (48,684) 9,410 (68,950) 113,811 (6,320) 5,474 (514) 0 995 9,410 113,811 (6,320) (514) Total stockholders’ equity Total stockholders’ equity 22,357 22,357 16,218 16,218 26,671 26,671 24,827 24,827 9,740 9,740 18,680 18,680 114,899 114,899 (116,010) (116,010) 117,382 117,382 Total liabilities and stockholders’ equity Total liabilities and stockholders’ equity $240,657 $240,657 $157,705 $157,705 $281,723 $281,723 $247,415 $247,415 $85,412 $85,412 $142,176 $142,176 $131,799 $131,799 ($122,954) ($122,954) $1,163,933 $1,163,933 58 147 5,357 2,923 418 0 0 0 0 0 0 0 0 0 0 2017 Annual Report Community Building Through Community Banking CONSOLIDATING SCHEDULE 1 - BALANCE SHEET (000s omitted except share data) December 31, 2017 A S S E T S German-American State Bank State Bank of Davis Northwest Bank State Bank Lena State Bank State Bank of Herscher Foresight Financial Group, Inc. Eliminations Consolidated Total $8,157 147 0 0 0 48,372 262 2,339 206,151 234 4,763 0 6,185 5,113 0 $5,833 3,524 4,122 3,453 0 53,168 148 0 171,135 0 1,652 0 1,411 2,969 0 $1,238 89 512 1,088 0 23,421 60 0 55,007 0 417 0 2,312 1,268 0 $2,897 118 0 4,473 0 47,680 186 0 76,284 469 1,948 1,223 4,355 2,543 0 $291 6,653 0 0 0 0 0 0 147 0 5,357 0 2,923 418 116,010 ($291) (1,346) (5,307) (116,010) $24,334 $9,427 4,634 10,672 766 273,001 950 2,339 777,920 1,092 16,320 1,223 22,168 19,087 LIABILITIES AND STOCKHOLDLERS' EQUITY $240,657 $157,705 $281,723 $247,415 $85,412 $142,176 $131,799 ($122,954) $1,163,933 $40,848 194,481 235,329 2,967 2,404 13,183 0 1,169 255,052 0 1,450 7,330 17,997 0 (106) 26,671 $26,579 177,563 204,142 0 14,619 2,962 0 865 222,588 0 1,000 4,672 19,139 0 16 24,827 $6,175 68,013 74,188 0 0 1,000 0 484 75,672 0 500 3,727 5,530 0 (17) 9,740 $22,638 95,323 117,961 2,392 1,772 1,000 0 371 123,496 0 400 28,443 (7,058) 0 (3,105) 18,680 $0 0 $0 0 0 5,663 10,000 1,237 16,900 0 995 9,409 113,810 (6,320) (2,995) ($291) (6,653) (6,944) $137,697 823,962 961,659 8,394 32,434 28,308 10,000 5,756 (6,944) 1,046,551 (3,850) (48,684) (68,950) 5,474 0 995 9,410 113,811 (6,320) (514) 114,899 (116,010) 117,382 Total liabilities and stockholders’ equity $240,657 $157,705 $281,723 $247,415 $85,412 $142,176 $131,799 ($122,954) $1,163,933 59 Cash and due from banks Interest-bearing deposits in banks Federal funds sold Interest-bearing deposits in banks - term deposits Securities: Securities held-to-maturity Securities available-for-sale Non-marketable equity securities, at cost Loans held for sale Loans, net Foreclosed assets, net Premises and equipment Core deposit intangible Bank owned life insurance Other assets Investment in subsidiary banks Total assets Liabilities: Deposits: Noninterest bearing Interest-bearing Total deposits Federal funds purchased Securities sold under agreements to repurchase Federal Home Loan Bank borrowings and other Subordinated debentures Accrued interest payable and other liabilities Total liabilities Stockholders’ equity: Preferred stock Common stock Additional paid-in capital Retained earnings Treasury stock Accumulated other comprehensive income (loss) Total stockholders’ equity $4,415 3,477 6 0 0 58,263 191 0 166,614 93 1,263 3,158 3,177 0 0 $27,534 183,925 211,459 1,063 4,500 0 1,278 0 400 2,885 19,081 0 (9) 22,357 $1,794 236 0 3,488 766 42,097 103 0 296 920 0 1,824 3,599 0 102,582 $14,214 111,310 125,524 1,972 13,639 0 0 352 0 100 1,628 14,262 0 228 16,218 218,300 141,487 2017 Annual Report Building on the past. Investing in the future. German-American State Bank German-American State Bank State Bank of Davis CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) (000s omitted except share data) State Bank of Davis Northwest Bank Northwest Bank State Bank State Lena Lena State Bank State Bank Foresight Financial Foresight Financial Consolidated Consolidated Bank State Bank State Bank of Herscher of Herscher Group, Inc. Group, Inc. Eliminations Eliminations Total Total For the year ended December 31, 2017 For the year ended December 31, 2017 Interest and dividend income: Interest and dividend income: Loans, including fees Loans, including fees Securities: Securities: Taxable Taxable Tax-exempt Tax-exempt Interest-bearing deposits in banks and other Interest-bearing deposits in banks and other Federal funds sold Federal funds sold Total interest and dividend income Total interest and dividend income Interest expense: Interest expense: Deposits Deposits Federal funds purchased Federal funds purchased Securities sold under agreements to repurchase Securities sold under agreements to repurchase Federal Home Loan Bank advances and other borrowings Federal Home Loan Bank advances and other borrowings Subordinated debentures Subordinated debentures Total interest expense Total interest expense $7,753 $7,753 $4,574 $4,574 $9,384 $9,384 $7,770 $7,770 $2,511 $2,511 $4,246 $4,246 779 691 90 6 9,319 1,544 4 0 54 0 1,602 779 691 90 6 9,319 1,544 4 0 54 0 1,602 507 642 138 3 5,864 1,064 2 107 0 0 1,173 507 642 138 3 5,864 634 622 56 7 10,703 1,064 2 107 0 0 1,173 1,651 5 13 82 0 1,751 634 622 56 7 10,703 9,297 9,297 3,229 3,229 5,290 5,290 (25) (25) 43,696 43,696 1,651 1,275 1,275 560 560 332 332 ($25) ($25) 6,401 6,401 5 13 82 0 1,751 1,419 1,419 585 585 340 340 (25) (25) 7,685 7,685 677 764 83 3 5 109 30 0 668 279 84 13 8 0 0 0 0 0 0 65 677 764 83 3 5 109 30 0 0 0 0 0 751 892 236 208 290 0 304 380 32 2 5 0 20 0 0 0 0 0 212 313 632 108 159 131 0 304 380 32 2 668 279 84 13 5 0 20 0 8 0 0 0 0 0 0 0 212 313 632 108 159 131 0 0 0 0 65 393 574 349 270 462 444 $36,241 $36,241 3,569 3,378 474 34 3,569 3,378 474 34 ($25) ($25) 3 0 0 16 0 19 0 0 0 240 600 840 3 0 0 16 0 19 0 0 0 240 600 840 0 0 29 229 426 600 29 229 426 600 0 0 0 1,658 869 15,982 2,096 1,207 946 404 7,109 5,253 0 0 0 1,658 869 3,445 7,099 15,982 2,096 1,207 946 404 7,109 27,744 14,498 5,253 Net interest and dividend income Net interest and dividend income 7,717 7,717 4,691 4,691 8,952 8,952 7,878 7,878 2,644 2,644 4,950 4,950 (821) (821) 0 36,011 36,011 Provision for loan losses Provision for loan losses 90 90 150 150 190 190 120 120 18 18 300 300 0 0 868 868 Net interest and dividend income, after provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Noninterest income: Customer service fees Customer service fees Equity in earnings of subsidiaries Equity in earnings of subsidiaries Gain on sales and calls of AFS securuties, net Gain on sales and calls of AFS securuties, net Gain on sales of loans, net Gain on sales of loans, net Loan-servicing fees Loan-servicing fees Gain on acquisition bargain purchase Gain on acquisition bargain purchase Other Other Total noninterest income Total noninterest income Noninterest expenses: Noninterest expenses: Salaries and employee benefits Salaries and employee benefits Occupancy expense of premises, net Occupancy expense of premises, net Outside services Outside services Data processing Data processing Foreclosed assets, net Foreclosed assets, net Other Other Total noninterest expenses Total noninterest expenses Income before income taxes Income tax expense (benefit) Income before income taxes Income tax expense (benefit) Net income Net income 60 7,627 7,627 4,541 4,541 8,762 8,762 7,758 7,758 2,626 2,626 4,650 4,650 (821) (821) 0 35,143 35,143 256 256 88 88 425 425 141 141 101 101 116 116 1,127 1,127 $10,966 $10,966 ($10,966) ($10,966) 0 52 0 0 863 1,171 2,643 302 245 419 (60) 1,346 4,895 3,903 1,490 0 52 0 0 863 1,171 0 0 0 0 245 333 2,643 302 245 419 (60) 1,346 4,895 881 155 217 153 14 578 1,998 0 0 0 0 245 333 881 155 217 153 14 578 1,998 0 1,606 804 0 926 3,761 5,124 887 177 429 5 2,324 8,946 1,606 804 0 0 926 3,761 5,124 887 177 429 5 2,324 8,946 0 0 0 0 751 892 236 208 290 0 853 3,802 0 0 393 574 1,915 12,881 1,915 (1,860) 12,881 (12,826) (1,860) (12,826) 3,445 7,099 2,215 2,215 1,799 1,799 2,688 349 270 462 444 1,024 4,348 100 812 1 605 4,206 2,688 100 812 1 605 (41) (881) (938) (41) (881) (938) 853 3,802 379 1,409 379 1,409 1,024 4,348 4,206 (1,860) (1,860) 27,744 3,903 1,490 2,876 951 2,876 951 3,577 1,064 3,577 1,064 4,848 1,972 4,848 1,972 1,530 592 1,530 592 876 575 876 575 7,854 (1,391) (1,391) 7,854 (10,966) (10,966) 14,498 $2,413 $2,413 $1,925 $1,925 $2,513 $2,513 $2,876 $2,876 $938 $938 $301 $301 $9,245 $9,245 ($10,966) ($10,966) $9,245 $9,245 2017 Annual Report Community Building Through Community BankingFor the year ended December 31, 2017 Interest and dividend income: Loans, including fees Securities: Taxable Tax-exempt Interest-bearing deposits in banks and other Federal funds sold Total interest and dividend income Interest expense: Deposits Federal funds purchased Subordinated debentures Total interest expense Securities sold under agreements to repurchase Federal Home Loan Bank advances and other borrowings Net interest and dividend income Provision for loan losses Net interest and dividend income, after provision for loan losses Noninterest income: Customer service fees Equity in earnings of subsidiaries Gain on sales and calls of AFS securuties, net Gain on sales of loans, net Loan-servicing fees Gain on acquisition bargain purchase Other Total noninterest income Noninterest expenses: Salaries and employee benefits Occupancy expense of premises, net Outside services Data processing Foreclosed assets, net Other Total noninterest expenses Income before income taxes Income tax expense (benefit) Net income German-American State Bank State Bank of Davis Northwest Bank State Bank Lena State Bank State Bank of Herscher Foresight Financial Group, Inc. Eliminations Consolidated Total CONSOLIDATING SCHEDULE 2 - STATEMENT OF INCOME (000s omitted except share data) $7,770 $2,511 $4,246 $7,753 $4,574 779 691 90 6 9,319 1,544 4 0 0 54 1,602 7,717 90 7,627 256 52 0 0 0 863 1,171 2,643 302 245 419 (60) 1,346 4,895 3,903 1,490 507 642 138 3 5,864 1,064 107 2 0 0 1,173 4,691 150 4,541 88 0 0 0 0 245 333 881 155 217 153 14 578 1,998 2,876 951 $9,384 634 622 56 7 10,703 1,651 5 13 82 0 1,751 8,952 190 8,762 425 0 1,606 804 0 926 3,761 5,124 887 177 429 5 2,324 8,946 3,577 1,064 677 764 83 3 9,297 1,275 5 109 30 0 1,419 7,878 120 7,758 141 0 0 0 0 751 892 2,215 236 208 290 0 853 3,802 4,848 1,972 304 380 32 2 3,229 560 5 0 20 0 585 2,644 18 2,626 101 0 0 0 0 212 313 632 108 159 131 0 379 1,409 1,530 592 $938 668 279 84 13 5,290 332 8 0 0 0 340 4,950 300 4,650 116 0 0 65 0 393 574 1,799 349 270 462 444 1,024 4,348 876 575 $301 3 0 0 16 0 19 0 0 0 240 600 840 (821) 0 (821) ($25) (25) ($25) (25) 0 0 $10,966 ($10,966) 0 1,915 12,881 2,688 100 812 1 605 4,206 7,854 (1,391) (1,860) (12,826) (41) (881) (938) (1,860) (10,966) $9,245 ($10,966) $36,241 3,569 3,378 474 34 43,696 6,401 29 229 426 600 7,685 36,011 868 35,143 1,127 0 0 1,658 869 0 3,445 7,099 15,982 2,096 1,207 946 404 7,109 27,744 14,498 5,253 $9,245 61 $2,413 $1,925 $2,513 $2,876 2017 Annual Report Building on the past. Investing in the future. General Information Foresight Financial Group, Inc. P.O. Box 339 809 Cannell-Puri Court, Suite 5 Winnebago, IL 61088 815.847.7500 investor.relations@ffgbank.net Board of Directors Robert W. Stenstrom Chairman, Board of Directors Chairman & CEO, Stenstrom Companies Frederick J. Kundert Harder Corporation Carolyn S. Sluiter, D.V.M. Veterinarian, New Hope Veterinary Clinic Judd Thruman, J.D. Partner, Fishburn, Whiton, Thruman, LTD Executive Officers Dean E. Cooke Chief Financial Officer Nora Koehler Director of Human Resources K. Denise Osadjan Chief Risk Officer 62 Registrar, transfer agent and change of address: Computershare Shareholder Services PO Box 30170 College Station, TX 77842-3170 800.368.5948 computershare.com/investor Market: OTC Pink Marketplace Trading symbol: FGFH Douglas A. Wagner Owner, Floor to Ceiling Charles B. Kulberg Retired John W. Collman Ag Production Aaron Patterson Chief Information Officer John W. Stichnoth SVP, Business Credit Banks’ Board of Directors Northwest Bank of Rockford Rockford, IL Charles B. Kullberg Stephen P. McKeever John J. Morrissey, C.P.A. Amy M. Ott Robert W. Stenstrom Thomas R. Walsh Lena State Bank Lena, IL Todd Bussian, O.D. Curt Derrer James Moest, D.V.M. Steven Rothschadl Judd Thruman, J.D. German-American State Bank German Valley, IL Robert Borneman John Collman Guy Cunningham Robert Ebbesmeyer, D.V.M. Kerry L. Hoops Angela K. Larson Michael Schirger, J.D. Jeffrey M. Sterling State Bank of Davis Davis, IL Dan Dietmeier Mary Hartman Thomas Olsen Carolyn Sluiter, D.V.M. Richard Stenzinger, C.P.A. Judd Thruman, J.D. State Bank Freeport, IL Mary Hartman Bruce Johnson Dr. Joe Kanosky Fred Kundert Christopher Schneiderman Marilyn Smit Brian Stewart Ken Thompson Douglas Wagner State Bank of Herscher, Herscher, IL Randall Chaplinski, J.D. Troy Coffman Wayne Koelling, C.P.A. Fred Kundert K. Denise Osadjan 63 2017 Annual Report Building on the past. Investing in the future. 809 Cannell-Puri Court, Suite 5 • Winnebago, Illinois 61088 • 815.847.7500 • foresightfg.com 809 Cannell-Puri Court, Suite 5 • Winnebago, Illinois 61088 • 815.847.7500 • foresightfg.com 

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